What Is a Limited Company (LC)?

A limited company (LC) is a general form of incorporation that limits the amount of liability undertaken by the company's shareholders. It refers to a legal structure that ensures that the liability of company members or subscribers is limited to their stake in the company by way of investments or commitments. In a legal sense, a limited company is a person.

The naming convention for this type of corporate structure is commonly used in the United Kingdom, where a firm's name is followed by the abbreviated "Ltd." In the United States, limited companies come in several forms, including the limited liability corporation (LLC).

[Important: Several variations of limited company exist around the world and are followed by standard abbreviations including Ltd., PLC, LLC, and AG to name just a few.]

How a Limited Company Works

As noted, in a limited company the assets and debts of the company are separate from those of the shareholders. As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.

Ownership in the limited company can be easily transferred, and many of these companies have been passed down through generations. Unlike a public company in which anyone can buy shares, membership in a limited company is governed by a company's rules and law.

A limited company can be "limited by shares" or "limited by guarantee." When limited by shares, a company is owned by one or more shareholders and managed by at least one director. In a limited by guarantee arrangement, a company is owned by one or more guarantors and managed by at least one director.

The primary benefit of a limited company is the separation of assets and income from the corporation and the owners and investors through limited liability. This means that if a company goes bust, shareholders can only lose as much as their original investment and no more—creditors or other stakeholders cannot claim owners' personal assets or income. Because of limited liability, investors are more eager to risk capital since their losses are limited in that sense.

Key Takeaways

  • A limited company (LC) is a general term for a type of business organization wherein owners' assets and income are separate and distinct from the company's assets and income—known as limited liability.
  • Because of this, owners' potential losses are limited to what they have invested and personal assets and income are off limits.
  • Several variations of limited company exist around the world and are followed by standard abbreviations including Ltd., PLC, LLC, and AG to name just a few.

Limited Company Benefits

Filing as a limited company comes with a number of benefits. They include:

  • A limited company and the people who run it are legally distinct.
  • A limited company structure provides a firewall between the finances of the company and its owners.
  • A limited company is allowed to own assets and retain any profits made after tax.
  • A limited company can enter into contracts on its own.

For the privilege, limited companies in the U.K. must pay a variety of taxes, such as a value-added tax (VAT) and capital gains tax, and must contribute to National Insurance. Limited companies in the U.K. receive favorable tax treatment once their income reaches a certain threshold (around GBP20,000). At that level, the corporate tax rate is a flat rate of 19% on profits.

By comparison, unincorporated businesses, such as sole traders and traditional partnerships, do not afford full limits on liability for owners because there is no legal distinction between the business and its owners. If such a business were to become insolvent, its owners would be responsible for its debts.

Limited Company Variations

Limited company structures 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 GBP50,000). Such a structure is widely employed by larger companies.

In the United States, a limited company is more commonly known as a corporation (corp.) or as incorporated (Inc.). Some states 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. 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 shares.