If you are planning to register a new limited company, you must first decide whether it will be limited by shares or limited by guarantee. The vast majority of companies are set up as limited by shares. This is an ideal legal structure if you want to keep business profits for yourself.

Limited by guarantee companies tend to be set up by non-profit businesses and charitable organizations. Surplus income is used to further the non-profit or charitable aims of the business, rather than being taken by the owners as personal income.

Whilst these two company types differ in terms of profit distribution, they both provide limited financial liability protection to the owners of the business, which is one of the main advantages of company formation.

What is a company limited by shares?

• An incorporated business structure that is viewed as a legal ‘person’ and is responsible for its own debts.
• Most popular company structure. Used by people who want to make a profit from their business activities. Suitable for businesses of all sizes, including startups.
• Owned by one person or more. These people are known as ‘shareholders’ and ‘members’. To become a shareholder, you must buy at least one share in the company.
• Shareholders enjoy limited liability. If the business becomes insolvent, they are only legally required to pay for their shares. The company itself is liable for all debts beyond this sum.
• Shareholders receive a share of business profits. The amount they receive depends on the ownership percentage represented by their shareholdings. Profits are issued as ‘dividends’.
• Members appoint directors to manage day-to-day activities. In most cases, shareholders appoint themselves as directors of their own company.

Why would I set up a limited by shares company?

• To run a profit-making business as a source of personal income. Suitable for new businesses and existing sole traders.
• To protect your personal finances. You will enjoy limited liability for business debts, rather than being held personally liable for all debts.
• Running a business as a limited company is one of the easiest and most effective ways to boost your professional status and present your business as a credible, established and trustworthy entity.
• Many incorporated firms are only prepared to do business with other limited companies, so it will enable you to compete on a level playing field.

What is a limited by guarantee company?

• An incorporated business structure that is viewed as a legal ‘person’ and is responsible for its own debts.
• There are no shares or shareholders. This type of company is owned by ‘guarantors’. They are also referred to as ‘members’.
• To become a guarantor, you must guarantee a fixed sum of money to the company. This is the extent of a guarantors personal liability to the business and it must be paid if the company becomes insolvent.
• Guarantors appoint directors to manage day-to-day activities. In most limited by guarantee companies, the guarantors appoint themselves as directors.

Why would I set up a limited by guarantee company?

1. To run a non-profit organization or charity.
2. To generate income for purely non-profit or charitable purposes, rather than for personal benefit.
3. To provide limited liability to the people who own the non-profit organization or charity.
4. To create a credible and established image for your non-profit or charitable organization. A limited company is viewed as more trustworthy and legitimate than an unincorporated business.

The choice is yours. Make sure you check out our in-depth guide to launching a startup: