Company Limited by Shares

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Corporate status

Incorporated

Terminology: governing document

"Memorandum and articles of association", usually abbreviated to "mem and arts". It is common for standard articles of association known as 'Table A' to be applied to share companies.

Terminology: governing body

"The directors" or "the board of directors", although the mem and arts may use some other term to describe the directors.

Management/governance structure

Essentially two-tier, with a board of directors accountable to a wider membership who will also be shareholders (the two terms are virtually synonymous). Members will typically hold voting rights at general meetings and will elect all or some of the directors.

Further embellishments may be added to this basic structure, e.g. an executive committee (smaller than the governing body, perhaps made up of honorary officers and senior staff), or a members' council, which may meet more frequently than the full membership and supervise the work of the directors.

However, it is possible (and quite common) to create a single-tier structure by simply stating that only directors may be members and vice-versa. Thus although these two roles will still exist within the company, the same people will perform both.

There is no longer a legal requirement for companies to appoint a company secretary. However, many companies choose to appoint an individual to this role as they carry out important administrative functions (and the company's governing document may state that a secretary must be appointed). The secretary may also be a member or director, but need not be. In funded community and voluntary organisations, the post of secretary will often form part of the job description of a member of staff.

Membership

A company limited by shares may be either private or public (public limited company = PLC).

In a company limited by shares, someone becomes a member by acquiring shares in the company. This may be by purchasing them, or the company's articles may specify that certain people (e.g. employees) are automatically entitled to receive one or more shares.

In a private company limited by shares, admission to membership is usually at the discretion of the directors, but an "open membership" system may apply where strict criteria are laid down, e.g. anyone who lives on such-and-such an estate is eligible to become a member. A co-operative company will automatically offer voluntary membership to everyone who shares a particular economic relationship with the company (e.g. employees in a worker co-operative, tenants in a housing co-operative, customers in a consumer co-operative, etc).The articles should always allow for the expulsion of members who act against the interests of the company.

Where there are members who have rather different interests in the company's work, the membership may be divided into two or more classes (e.g. representatives of statutory bodies, representatives of local business, community members, user-members and so on). In a conventional share company, voting rights are apportioned in accordance with the number of shares each member holds (one share, one vote), but the articles may specify one member, one vote.

A private company must have a minimum of one member. As the single member may be another organisation, a one-member company is useful legal form for subsidiaries. It is not possible to register a single-member public company.

Governing legislation

Governed primarily by the Companies Acts 1985, 1989 and 2006, plus a number of other statutes applying to companies (e.g. the Insolvency Act, the Company Directors Disqualification Act).

Charitable status available?

Yes but this is very uncommon and governance would be heavily scrutinised by the Charity Commission.

Profit distribution permitted?

The articles will specify whether or not profit distribution is permitted. The ability to distribute profits to members/shareholders is the norm in a share-capital company but it is not obligatory. Distribution of surpluses to members is usually permitted in co-operative enterprises using a share company structure.

Summary of advantages of being a Company Limited by Shares

Relatively cheap to register compared to an IPS
Flexible legal form
Well understood legal form
Can issue shares and attract investors

Summary of disadvantages of being a Company Limited by Shares

Added complications if you wish to be a charity
Not favoured by funders as deemed to be "for profit"
A private company limited by shares cannot do a public share issue

Examples of use

Companies have few inherent characteristics and so it is possible to design almost any sort of structure within a company vehicle.

A relatively small number of social enterprises are structured as companies limited by shares, and those would mainly be employee-owned businesses. There are also some examples of Community Land Trusts structured as company limited by shares.

The private company limited by shares was once the normal legal form for the trading subsidiaries of charities, but since 1985 it has been possible to use a guarantee company for this purpose. A share capital company may be used by a group of voluntary or community organisations for a for-profit trading venture.

The public limited company (PLC) is quite complicated and expensive to establish but is permitted to issue shares to the public (which a private company may not). It can thus be a suitable vehicle for social investment funds (or CDFIs - community development finance initiatives).

Participation issues

Companies have the potential to be membership-based, so encouraging an active membership is an appropriate method of promoting participation; especially where the members share a common interest or condition. Companies Limited by Shares commonly relate the amount of control a member has to the size of their shareholding, which is inconsistent with the one member one vote principle of a co-operative. It is possible to amend the memorandum and articles of a share company to enable it to be a co-operative by allowing for both voting shares (one per shareholder) and investment shares.

Otherwise companies are free to utilise most of the other common methods of encouraging participation, including profit distribution in appropriate circumstances.