What Is Ltd. (Limited)?
Ltd. is a standard abbreviation for "limited," a form ofcorporate 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 public or private limited company.
In a limited company, owners' and shareholders' liabilities are limited to the capital they originally invested. If such a company becomes insolvent, the owners' personal assets remain protected because the business is a legal entity and liable for its debts.
Key Takeaways
- Ltd. is a standard abbreviation for "limited," a form ofcorporate 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, pays taxes on them, distributes a portion to shareholders as dividends (if applicable), and retains the rest as working capital. A director may withdraw funds only for a salary, dividend payment, or loan.
Limited companies are an organizational form that features limited liability, similar to corporations in the U.S.
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 personal finances to avoid confusion.
Public limited companies (PLCs) are commonly used in the U.K. and some Commonwealth countries. The mandatory use of the PLC abbreviation after the company's name serves to instantly informinvestors or anyone dealing with the company that the company is public and probably fairly large.
PLC stock can belistedor 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 and the risks associated.
How to Set up a Limited Company
For anyone in the U.K., there are several things you'll need 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 country 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 £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 corporation is similar to a limited company, using the suffix inc. (incorporated) or corp. (corporation).Some states in the U.S. do permit the use of Ltd.(limited) after a company name.
These designations depend 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. Limited liability companies (LLCs)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 public shares.
Advantages and Disadvantages of a Limited Company
Advantages
Because the number of shareholders is unlimited, ownership is spread among multiple owners rather than just one. Also, shareholders only lose as much as they have 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 lose is $3,750, the value of the 25 shares each member holds.
A limited company has greater tax advantages than a sole proprietorship, partnership, or similar organization because the owners are not personally responsible for paying taxes—the company, as a legal entity, is. The company continues to exist if an owner sells or transfers their shares as long as it has other shareholders and remains profitable and operational.
Disadvantages
When shares are sold privately, the amount of capital raised might be restricted because offering shares to the public opens up the possibility of much more funding. This also restricts any opportunity for growth a company might want because the pool of investors is limited.
The costs for setting up a limited company are generally higher than those of sole traders (in the U.K.) and sole proprietorships (in the U.S.). These entities are small businesses that are only required to register to conduct business, thus incurring much lower costs.
In the U.K., both public and private companies have to file financial statements that are available to the public. This is different to the U.S., where private companies' financial statements are, indeed, private. There are disadvantages to having your company's financial statements publicly available, not least because your competitors can find out a lot about your business. There is some relief from these rules for smaller Ltd companies in the U.K., which are allowed to file abbreviated accounts that do not show much information.
Running a business as a limited company requires a time-consuming process that requires the owners to follow accounting principles, tax filing requirements, administration requirements, and stricter employee regulations regarding benefits.
Pros
Ownership is diversified among shareholders
Personal assets are protected
Potential tax advantages
Cons
Privately sold shares limit capital raising
Higher starting costs
Stricter accounting and administrative requirements
Are LLC and Ltd. the Same?
Limited liability companies (LLCs, U.S.) and limited companies (Ltd., U.K. and others) are two different types of business structures. LLCs are unincorporated business entities, while limited companies are incorporated in their jurisdictions. Key differences in their jurisdictions stipulate the different rules regarding ownership, liability, taxes, and dividends.
What Are the Pros and Cons of a Limited Liability Company?
The pros of a limited liability company (LLC), which is a U.S.-based legal entity that is different from a limited company, 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) to limit their liability to the capital they invest. If the business cannot pay its liabilities and declares bankruptcy, creditors can only go after business assets, not the owner's personal assets.
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., where in the U.S., a similar type of company is an incorporated business.
