A private company limited by shares is a separate legal person, owned by shareholders whose liability for its debts is capped at any amount unpaid on their shares. It is the standard form for UK trading companies: it can be formed by one person, needs at least one director, is governed by its articles (the model articles by default) and is prohibited from offering its shares to the public.

What is a private company limited by shares in law?

Section 3 of the Companies Act 2006 defines a limited company as one where the liability of members is limited by its constitution, and says a company is limited by shares if that liability is limited to the amount, if any, unpaid on the shares they hold. Section 4 defines a private company simply as any company that is not a public company. Put together, the private company limited by shares is the default the Act assumes for most businesses.

On registration, section 16 makes the subscribers and later members a body corporate with the name on the certificate of incorporation, capable of exercising all the functions of an incorporated company. GOV.UK describes this as the company being legally separate from the people who own it. The company owns its assets, signs its contracts and owes its own debts and tax. The shareholders own shares, which section 541 classes as personal property and section 544 makes transferable in accordance with the articles.

How is one formed?

Section 7 allows a company to be formed by one or more persons subscribing to a memorandum of association and complying with the registration requirements. The memorandum, under section 8, states that the subscribers wish to form the company and agree to become members, taking at least one share each. The application under section 9 must state, among other things, whether liability is limited by shares or by guarantee and whether the company is private or public, and section 10 requires a statement of capital and initial shareholdings showing the number, nominal value and class of shares and how much is paid up.

GOV.UK notes that when registering online the memorandum is created automatically, and that it cannot be updated after registration. Articles can be the model articles or bespoke; under section 20, the model articles fill any gap the registered articles do not exclude. The steps are covered in how to incorporate a company.

What does limited liability actually protect?

If the company is wound up, section 74(2)(d) of the Insolvency Act 1986 provides that no contribution is required from a member of a company limited by shares beyond the amount unpaid on their shares. GOV.UK explains that shareholders will need to pay for their shares in full if the company has to shut down, and that a low share value, such as £1, keeps that liability to a reasonable amount. Article 21 of the model articles requires shares to be issued fully paid, except subscriber shares on formation, so in many small companies the shareholders’ exposure as shareholders is already nil.

Limited liability protects the shareholder’s capacity as an investor. It does not cover:

  • personal guarantees signed for bank loans, leases or supplier credit;
  • liabilities a director can incur personally, for example a contribution ordered for wrongful trading under section 214 of the Insolvency Act 1986, covered in when directors are personally liable;
  • money owed to the company on an overdrawn director’s loan account.

Who controls the company?

Control is split between the board and the shareholders. Article 3 of the model articles makes the directors responsible for managing the business, with all the company’s powers. The shareholders keep a reserve power under article 4 to direct the directors by special resolution, and the Act reserves key decisions to them, such as amending the articles by special resolution (section 21) and removing a director by ordinary resolution (section 168). Section 282 defines an ordinary resolution as a simple majority and section 283 a special resolution as at least 75 per cent. Section 33 makes the constitution binding between the company and its members as if they had covenanted to observe it. For the detail, see ordinary and special resolutions.

How does it differ from a public company?

Feature Private limited company Public limited company
Minimum directors One (section 154) Two (section 154)
Company secretary Not required (section 270) Required (section 271)
Offering shares to the public Prohibited (section 755) Permitted
Minimum share capital None £50,000 authorised minimum before trading (sections 761 and 763)
Accounts filing period Nine months (section 442) Six months (section 442)
Members’ decisions Written resolution or meeting (section 281) Meeting only (section 281)
Name ending Limited or Ltd (section 59) Public limited company or plc (section 58)

The ban on public offers in section 755 covers offering securities to the public and allotting them with a view to such an offer. Section 755(3) only permits an offer made in good faith as part of arrangements to register again as a public company, or with an undertaking to do so within the specified period.

What must the company do every year?

The directors must file accounts with Companies House within nine months of the end of the accounting reference period (section 442), and deliver a confirmation statement within 14 days after each review period (section 853A). The company pays Corporation Tax on its profits. GOV.UK reminds directors that they can hire an accountant but remain legally responsible for the company’s records, accounts and performance. It must keep a register of members, and any shareholder holding more than 25 per cent of shares or voting rights is a person with significant control, according to GOV.UK. See confirmation statements and directors’ tax responsibilities.

How does limited liability work in an example?

Illustration only. Priya forms a company with 100 ordinary shares of £1 each, fully paid on issue. She is the sole director. Two years later the company fails owing suppliers £40,000 and a landlord £15,000.

  • As a shareholder, Priya owes nothing further: her £100 is already paid.
  • She signed a personal guarantee for the lease, so the landlord can pursue her personally under that guarantee.
  • If her director’s loan account was overdrawn by £6,000, the liquidator can recover that from her as a debt owed to the company.

Had the shares been issued at £1 each but left unpaid, she would also owe the unpaid £100 on a winding up.

How does it compare with other structures?

A company limited by guarantee has members but no shares, and section 5 prevents a guarantee company being formed with a share capital. An unlimited company has no cap on members’ liability (section 3(4)). A limited liability partnership is a different vehicle again, with members rather than shareholders. The tax trade offs against trading personally are covered in sole trader vs limited company.

What are the common misunderstandings?

  • Believing limited liability shields directors from personal guarantees and director specific liabilities.
  • Treating company money as the owner’s own, which creates director’s loan account and tax problems.
  • Assuming the model articles suit a company with several owners; they say nothing about leavers or deadlock.
  • Advertising shares widely to raise money without considering section 755.
  • Missing filing deadlines because the company has stopped trading; GOV.UK confirms a dormant company must still file a confirmation statement and annual accounts.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.