A limited company is created by a process of registration under the Companies Acts and is a legal "person" separate from the individual shareholders in the company. The ability to create a limited company by a simple process of registration (rather than, for example, by a private Act of Parliament) dates from the Nineteenth Century and was and is designed to encourage business enterprise. An individual or group of people may be willing to risk their money on a new business venture but the risk of losing not just the money they have put into the business, but everything they have and being made bankrupt, if the business is not successful, is a strong disincentive. By creating a limited company the entrepreneurs can limit the risk - they still risk losing everything they have put into (or agreed to put into) the company but that is the extent of the risk: their other assets are not at risk, and they do not risk personal bankruptcy. There may be special situations where particular shareholders are at greater risk, for example if a shareholder personally guarantees a bank loan to the company, if a shareholder has induced others to invest in the company by a misrepresentation, or if a shareholder is actively involved in running the company and is responsible for carelessly causing a bodily injury to a customer, but the normal principle is that the liability of a shareholder is "limited" to the amount they have paid, or agreed to pay, for the shares they hold.
The flip side of limited liability for shareholders is potentially increased risk for customers, at least in theory, and for this reason limited companies are subject to regulations which require them to file accounts with Company House every year which are then available to the public. There are also legal restrictions on the ability of companies to pay out dividends to shareholders (they can only be paid out of profits) and on giving loans to directors and related persons.
Every company has Articles of Association, registered with Companies House, which set out the constitutional "rule book" of the company dealing with such matters as the quorum for meetings, and how directors are appointed and removed. Generally "majority rule" prevails so that shareholders who together hold more than 50% of the voting shares can control the company. In the case of large public companies whose shares are traded on a stock exchange, majority rule usually poses little difficulty because any shareholder who does not like the way the company is being run, has the option of selling their shares on the stock exchange at the market rate. In the case of smaller, private companies, however, it is possible for a small number of shareholders to cause a company to be run in a way which is unfair to other shareholders. For example three shareholders holding 60% of the voting shares might appoint themselves directors on high salaries and declare very small dividends so that the fourth shareholder with 40% of shares receives very little in return for his investments (the other three shareholders also receive small dividends as shareholders but have large salaries in addition to compensate them). The law recognises that it is possible for a company to be run strictly in accordance with the Articles of Association but yet to be run in a way which is unfair to some shareholders,and such shareholders can bring a claim in such circumstances on the grounds that the "company's affairs are being or have been conducted in a manner that is unfairly prejudicial" to their interests.
The relationship of directors to the company varies between what may be called "executive directors" and "non-executive" directors. Non-executive directors contribute to discussions and cast their votes in formal resolutions at meetings of the board of directors, but they do not have a "job" with the company or any day to day management responsibilities. Executive directors, on the other hand, are both members of the board of directors and employees of the company carrying out specific managerial or other jobs for the company. Particularly in small companies where directors may be major shareholders (indeed there may be only one person who is the only director and a 100% shareholder) the terms of employment may be somewhat informal. Such informality may cause few practical problems whilst the company is doing well, but if there is a decline in profitability and the company eventually goes into insolvent liquidation, there can be disputes between the liquidator, now controlling the company, and the director. For example the director may be one of the company's creditors if the director has not, due to cash-flow problems, received his full salary in the years and months leading up to liquidation, but if there has been undue informality the liquidator may dispute whether there truly is a debt owed by the company to the director.
The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but contact me for advice
This page was lasted updated in October 2016 Disclaimer