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.
Limited companies are an organizational form that features limited liability.
The Basics of a Ltd. Company Structure
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.
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, as opposed to "Inc." or "Ltd.," which are the norm in the U.S. and elsewhere. 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.
PLCs 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.
PLCs are often best used to raise capital, but they also bring increased regulation.
All companies listed on the London Stock Exchange (LSE) are PLCs.
How to Set up a Private Limited Company
For anyone in the U.K., there are several things you'll need in order to set up a private 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 percent 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.
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 of a Private Limited Company
Because the number of shareholders is unlimited, liability is spread among multiple owners rather than just one. A shareholder loses only as much as he invested if the company becomes insolvent. For example, say a private 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 private 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 his shares, securing jobs, and resources for the community. Because a private limited company produces goods at a lower cost and increases profits, financial institutions loan the company more money for operations and expansions and the company’s annual revenue increases.
Disadvantages of a Private Limited Company
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 offer a personal guarantee to repay the debt if the company cannot; the director’s personal assets are put at stake and not protected under private limited company laws. 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.
- 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).