Business and organisational characteristics - Private limited companies

Learning Outcomes

After reading this article, you will be able to explain the legal characteristics of private limited companies, including their separate legal personality, the principle of limited liability, and the basic structure of company governance. You will be able to distinguish these features from those of unincorporated businesses and apply key statutory and case law principles to SQE1-style questions.

SQE1 Syllabus

For SQE1, you are required to understand the business and organisational characteristics of private limited companies from a practical and legal standpoint. This article addresses the following syllabus points:

• the legal status and organisational features of private limited companies in England and Wales
• the concept of separate legal personality and its implications
• the principle of limited liability for shareholders
• the distinction between ownership and management in company structure
• the advantages and disadvantages of operating as a private limited company

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is meant by "separate legal personality" in the context of a private limited company?
2. To what extent are shareholders personally liable for the debts of a private limited company?
3. Who is responsible for the day-to-day management of a private limited company?
4. Name one statutory document that governs the internal rules of a private limited company.

Introduction

A private limited company is a type of incorporated business structure created by registration under the Companies Act 2006. It is treated by law as a person distinct from its shareholders and directors.

Key Term: separate legal personality
A company is a legal person, distinct from its members and directors. It can own property, enter contracts, and sue or be sued in its own name.

The Principle in Salomon v A Salomon & Co Ltd

The leading authority on separate legal personality is Salomon v A Salomon & Co Ltd [1897] AC 22. The House of Lords confirmed that, once incorporated, a company is a separate legal entity, even if one person controls all the shares.

Practical Consequences

• The company owns its assets; shareholders do not have a direct interest in company property.
• The company is liable for its own debts and obligations.
• The company can enter contracts and be a party to litigation in its own name.

Worked Example 1.1

Scenario:
Jasmine is the sole shareholder and director of Jasmine Interiors Ltd. The company owns a van. Jasmine uses the van for company business, but it is registered in the company’s name. The van is damaged in an accident.

Answer:
The van belongs to the company, not Jasmine personally. Any insurance claim or legal action must be brought by or against Jasmine Interiors Ltd, not Jasmine herself.

Limited Liability of Shareholders

A key feature of private limited companies is limited liability. This means that shareholders are only liable for the company’s debts up to the amount unpaid on their shares.

Key Term: limited liability
Shareholders are not personally responsible for the company’s debts beyond any amount unpaid on their shares.

Statutory Basis

Section 3(1) Companies Act 2006 provides that a company limited by shares limits the liability of its members to the amount unpaid on their shares.

Effect in Practice

• If a shareholder has fully paid for their shares, they have no further liability if the company is wound up.
• Creditors of the company cannot pursue shareholders’ personal assets for company debts.

Worked Example 1.2

Scenario:
Omar holds 500 fully paid £1 shares in GreenTech Ltd. The company becomes insolvent and owes £100,000 to suppliers.

Answer:
Omar has no further liability. He will lose the value of his shares, but his personal assets are not at risk for the company’s debts.

Ownership and Management Structure

A private limited company separates ownership (shareholders) from management (directors).

Key Term: directors
Individuals appointed to manage the company’s business and exercise its powers on a day-to-day basis.

• Shareholders own the company by holding shares.
• Directors are responsible for running the company and making business decisions.
• The company’s internal rules are set out in its articles of association.

Key Term: articles of association
The statutory contract that sets out the company’s internal governance, including powers of directors and rights of shareholders.

Worked Example 1.3

Scenario:
A shareholder in BlueWave Ltd disagrees with a business decision made by the directors. The shareholder wants to overrule the directors’ decision.

Answer:
Unless the articles of association or statute require shareholder approval for that specific decision, the directors have authority to manage the company’s business. Shareholders cannot interfere with day-to-day management.

Advantages and Disadvantages of Private Limited Companies

Advantages

• Limited liability protects shareholders’ personal assets.
• Separate legal personality allows the company to own property and enter contracts.
• Continuity – the company continues to exist despite changes in ownership.
• Access to finance – companies can issue shares and grant security over assets.

Disadvantages

• Regulatory requirements – companies must file annual accounts and other documents at Companies House.
• Public disclosure – company information is available to the public.
• Administrative costs – higher than for sole traders or partnerships.
• Restrictions on share transfers – shares cannot be freely sold without following procedures in the articles.

Exam Warning

For SQE1, be careful not to confuse the company’s debts with the personal debts of its shareholders or directors. Only in rare cases (such as fraud or wrongful trading) can the courts disregard the company’s separate personality and impose liability on individuals.

Comparison with Unincorporated Businesses

Key Point Checklist

This article has covered the following key knowledge points:

• A private limited company is a separate legal person, distinct from its shareholders and directors.
• Shareholders benefit from limited liability and are not personally responsible for company debts beyond any unpaid share capital.
• Directors manage the company’s business, while shareholders own the company and exercise control through voting rights.
• The company’s internal rules are set out in the articles of association.
• Private limited companies offer advantages such as limited liability and continuity, but also face regulatory and disclosure requirements.

Key Terms and Concepts

• separate legal personality
• limited liability
• directors
• articles of association