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What Is Ltd. (Limited)?
Ltd. is a standard abbreviation for “limited,” a form of corporate structure available in countries including the U.K., Ireland, and Canada. The term appears as a suffix that follows the company name, indicating that it is a private limited company. In a limited company, shareholders’ liability is limited to the capital they originally invested. If such a company becomes insolvent, the shareholders’ personal assets remain protected.
Key Takeaways
- Ltd. is a standard abbreviation for “limited,” a form of corporate structure available in countries including the U.K., Ireland, and Canada and appears as a suffix after the company name.
- Limited companies limit the liability of a corporate loss to the business and do not impact the private assets of owners or investors.
- Limited companies may be set up as either private or public (PLC).
Understanding Ltd. (Limited)
A limited company is its own legal entity. A private limited company has one or more members, also called shareholders or owners, who buy in through private sales. Directors are company employees who keep up with all administrative tasks and tax filings but do not need to be shareholders.
The company’s finances are separate from the owners’ and are taxed separately. The company owns all profits and pays taxes on them, distributes a portion to shareholders as dividends, and retains the rest as working capital. A director may withdraw funds only for a salary or dividend payment or loan.
Limited companies are an organizational form that features limited liability.
By setting up a private limited company, it becomes separate from the people who run it. Any profits made by the company can be pocketed after taxes are paid. The corporation’s finances must be kept separate from any personal ones in order to avoid confusion.
Public limited companies (PLCs) are also commonly used in the U.K. and some Commonwealth countries. The mandatory use of the PLC abbreviation after the name of the company serves to instantly inform investors, or anyone dealing with the company, that the company is public and probably fairly large.
PLC stock can be listed or unlisted on a stock exchange. Like any other major entity, they are strictly regulated and are required to publish their true financial health so shareholders (and future stakeholders) can size up the true worth of their stock. The lifespan of a PLC is not determined by the death of a shareholder.
How to Set up a Limited Company
For anyone in the U.K., there are several things you’ll need in order to set up a limited company, including:
- A business name and address
- At least one director and at least one shareholder
- A memorandum and articles of association (an agreement to create the company and the rules in writing)
- Names of people who have significant control over the company (people with more than 25% of the shares or voting rights)
Once you have these together, you can then register as a private limited company.
Types of Limited Companies
Limited company structures are common worldwide and are codified in many nations, though the regulations governing them can differ widely from one nation to the next. For example, in the United Kingdom, there are private limited companies and public limited companies.
Private limited companies are not permitted to offer shares to the public. They are, however, the most popular structures for a small business. Public limited companies (PLCs) may offer shares to the public to raise capital. Those shares may trade on a stock exchange once a total share value threshold is met (at least GBP 50,000). Such a structure is widely employed by larger companies.
All companies listed on the London Stock Exchange (LSE) are PLCs.
In the United States, a limited company is more commonly known as a corporation (corp.) or with the suffix incorporated (inc.). Some states in the U.S. do permit the use of Ltd. (limited) after a company name.
Such a designation depends on filing the correct paperwork; just adding the suffix to a company name does not provide any liability protection. Limited companies in the U.S. are required to file corporate taxes annually with regulators. A limited liability company (LLC) and limited companies have different structures.
Many countries differentiate between public and private limited companies. For example, in Germany, the Aktiengesellschaft (AG) designation is for public limited companies that can sell shares to the public while GmbH is for private limited companies that cannot issue shares.
Advantages and Disadvantages of a Limited Company
Advantages
Because the number of shareholders is unlimited, liability is spread among multiple owners rather than just one. A shareholder loses only as much as they invested if the company becomes insolvent.
For example, say a limited company issues 100 shares valued at $150 each. Shareholder A and Shareholder B own 50 shares each and paid in full for 25 shares each. If the company becomes insolvent, the maximum amount Shareholder A and Shareholder B each pay is $3,750, the value of the remaining 25 unpaid shares each member holds.
A limited company has greater tax advantages than a sole proprietorship, partnership, or similar organization. The company exists into perpetuity even if an owner sells or transfers their shares; securing jobs and resources for the community.
Disadvantages
Shares are sold privately, restricting the amount of capital raised. All shareholders must agree to sell or transfer shares to someone outside the company. The company can borrow money, but a director must often give a personal guarantee to repay the debt if the company cannot, though this is not always required. The director’s personal assets are put at stake and not protected under private limited company laws if a guarantee is provided.
If a loan is owed to the company at year-end, additional taxes apply. A director becomes personally liable if the company becomes insolvent and the director does not act in the best interest of the creditors.
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Privately sold shares limit capital raising
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All shareholders must be in agreement to sell or transfer
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Director can incur higher liabilities
Are LLC and Ltd. the Same?
For the most part, LLC and Ltd. are the same type of company. LLC (limited liability company) is more commonly used in the U.S. whereas Ltd. (limited) is more commonly used in the U.K. The differences in types and jurisdictions stipulate the different rules regarding ownership, taxes, and dividends.
What Are the Pros and Cons of a Limited Liability Company?
The pros of a limited liability company (LLC) include the protection of personal assets by legally separating the owner’s personal assets from their business assets, pass-through taxation, and easier filing taxes. The cons include being more costly to set up and maintain than a general partnership or sole proprietorship, more difficult to transfer ownership, and typically higher taxes.
Why Do Businesses Use Ltd.?
Businesses incorporate themselves as Ltd. (limited) for the primary reason of limiting their liability to the capital they invested. If the business goes bust and it owes creditors money, creditors can only go after business assets, not the personal assets of the owner.
The Bottom Line
Ltd. (limited) structured corporations provide owners with a degree of financial protection, limiting recourse to only the amount invested in the business while keeping their personal assets safe. This type of abbreviation is more commonly used in the U.K. and not in the U.S., wherein in the U.S. a similar type of company is a limited liability company (LLC).
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