When embarking on the journey of establishing a business, choosing the right legal structure is crucial. Two common options are Limited and Unlimited Companies, each with its own set of features and implications. In this article, we will delve into seven fundamental differences between Limited and Unlimited Companies to provide a comprehensive understanding for entrepreneurs. See sections 42 and 43 of the Companies and Allied Matters Act 2020.
A company can either be private or public. A company can also be limited by shares, limited by guarantee, and unlimited. In essence, the types of company that can be incorporated in Nigeria are: private company limited by shares (Ltd), public company limited by shares (Plc), private company limited by guarantee, public company limited by guarantee, private unlimited company, and public unlimited company.
From the above, it can be seen that a company may be limited by shares or by guarantee and in which case, they can either be private or public companies. On the other hand, a company may also be incorporated as unlimited, and in which case, it may be private or public. These types of companies have their peculiarities and legal effects which shall be adequately discussed in the course of highlighting their differences.
Differences between limited and unlimited company
1. The extent of members’ liability: A company has separate legal personality from its members. This legal personality shields its members from the liability incurred by the company. However, the extent of the members’ liability depends on the type of company. For unlimited companies, the liability of its members is unlimited. In essence, the members are liable for the debts and liabilities incurred by the company in the course of its business. Consequently, the members of an unlimited company can be proceeded against personally to satisfy the company’s debts.
On the other hand, the liability of the members of a limited company is only to the amount they have undertaken through the acquisition of shares or statement of guarantee (as the case may be) in the company. In the event of the company being wound up, they are liable only to the amount of their shares or guarantee. Members of an unlimited company do acquire shares. See section 25 of CAMA 2020. Their shares, notwithstanding, their liability to the company is unlimited.
2. The degree of influence on investors: Limited companies tend to attract more investors than unlimited companies. One good thing about running a company is that people are allowed to invest in the company. Through their investments, the company gets capital for its operation. Such investments could be by way of acquiring shares and debentures. While the acquisition of shares makes one a member of the company, being a debenture holder does not by itself make the holder a member of the company.
Now, the degrees at which limited companies attract investors differ and ordinarily outweigh the degree at which unlimited companies attract investors. This is because, people would be more inclined to invest in a company where their liability is limited to an amount determined by them through the number of shares they acquire or through their statement of guarantee (as the case may be). In fact, investing in an unlimited company is a risk of which the extent cannot be determined until the need for satisfying the company’s liabilities arise.
3. Name as stated in the memorandum of association: During the process of registration, if the company is intended to be registered as unlimited, the name of the company must end with the tag “ultd” which simply means “unlimited”. The company is also required to display its status as unlimited in any where the company’s name is published. On the other hand, and accordingly, limited companies must end with the prescribed tags showing the company’s type.
For private companies limited by shares, it must be followed by “Ltd”; for public companies limited by shares – “Plc”; for public limited by guarantee- “Plc/Gte”; and for private companies limited by guarantee- “Ltd/Gte”. Each of them may be written in full or abbreviated. Section 29 of the Companies and Allied Matters Act 2020 is instructive on this.
4. Requirement for conversion and re-registration: Converting to an unlimited company requires the assent of all the members of the company. It must be noted that after a company has been duly registered as a particular type, it is possible to still convert it from its current status to another type of company. However, the law is clear that certain protocols and requirements must be met and complied with.
The requirement for the conversion and re-registration depends on the current status of the company and the type of company it wants to convert to. Converting from one type of company to another requires special resolution that the conversion be made. Of course, this is one out of other prescribed requirements. But here, one notable distinction between limited and unlimited company with respect to conversion and re-registration is that in the case of converting from any type to unlimited company, the consent of all the company members shall be obtained.
Whereas converting to others require special resolution which is two-third of the members’ assent entitled to vote at the resolution. The reason for the requirement of the consent of all the members in the case of a conversion to an unlimited company is clear. An unlimited company has the legal implication of extending the company’s liabilities to the members without limits. This is a risk which every member must assent to before the conversion and re-registration can be made. This is of course in addition to other requirements as provided by the law.
5. Separate legal personality: Clearly, all limited companies have separate legal personality. This is because the company is liable for its own debts and obligations. The members are liable only to the amount they have undertaken by their shares or guarantee.
On the other hand, the separate legal personality of an unlimited company is questionable. This is because the members are still liable to the company’s debts and obligations to its fullest, in a case where the company becomes unable to discharge them. This factor in fact defeats the notion of separate legal personality.
6. Perpetuity of existence: Limited companies can last in perpetuity as long as they are not struck off, wound up or dissolved. Death, exit or resignation of its members does not affect the existence of limited companies. On the other hand, death, resignation and other factors can cease the existence of an unlimited company.
7. Protection of members and their properties: Still on the issue of liability, limited companies shield its members from liability beyond their undertaken amount. In essence, the members are not exposed to the risk of proceeding to their properties in the event of discharging the company’s liabilities.
This cannot be said for unlimited companies, for it does not offer guarantee of protection to the properties of its members in the event of discharging the company’s liabilities.
Limited company and unlimited company are significantly the opposites of each other, although they bear similar qualities of a company. As already seen, the legal implications of the both types of company differ in some instances, hence why it is necessary to understand the differences as discussed above.