What is Ltd. (Limited)
Ltd. is an abbreviation for "limited," a form of incorporation available in the U.K., Ireland, Canada and other Commonwealth countries. 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.
BREAKING DOWN Ltd. (Limited)
A limited company is its own 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.
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.
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.