Limited companies exist as a legal entity in their own right, so the limited company’s finances are separate from the personal finances of their business owners.

Shareholders can be individuals or other companies. They’re not responsible for the limited company’s debts, unless they have given guarantees (of a bank loan, for example). But they may lose the money they have invested in the limited company if it fails.

Here’s a breakdown of private limited companies and public limited companies:

Limited company #1: Limited company by shares

A limited company by shares is the most well known type of limited company and is commonly used for a small business. The limited company issues shares and the profits can be distributed to shareholders as a dividend.

The shareholder’s liability in a limited company by shares is limited to the nominal value of the shares held by the shareholder. If the shareholder agrees to pay more than the nominal value, their liability is for that greater sum. Provided that the limited company is successful, the value of the shares should increase but if the limited company goes into liquidation, the shareholder can lose this investment.

Find out more on how to form a limited company by shares.

Limited company #2: Limited company by guarantee

A limited company by guarantee is usually used by “not for profit” organisations, such as clubs or charities. A limited company by guarantee doesn’t issue shares and profits are not distributed to the members.

The member’s liability in a limited company by guarantee is limited to an amount the member has personally guaranteed to contribute to the assets of the limited company if it’s wound up, and this guarantee also applies for a period of one year after membership has ceased.

Limited company #3: Public limited company

The shareholder’s liability in the PLC will be limited to the nominal value of the shares held by the shareholder. If the shareholder has agreed to pay more than the nominal value, the liability is for that greater sum.

When the public limited company is first incorporated, the PLC’s name and Memorandum of Association must specify that it’s a public limited company. The statutory rules which a public limited company must comply with are stricter than those which apply to private companies.