What is Ltd. (Limited)?

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Definition:

LTD (Limited) is a corporate structure commonly used in the United Kingdom, Canada, and Ireland, that protects shareholders’ personal assets even if the company becomes insolvent.

🤔 Understanding LTDs

LTD (Limited) is a way to structure a company legally that confers tax benefits and reduces shareholders’ liability. By making a company a separate legal entity from its shareholders, even if the company becomes insolvent (can’t pay back its debts), none of the shareholders’ personal assets will be subject to liquidation (under most circumstances). A limited structure can also protect the shareholder’s personal assets from lawsuits. Additionally, the company and its shareholders are taxed separately. Limited companies are common in the United Kingdom, Canada, and Ireland, and are similar to LLCs in the United States (some U.S. states also allow businesses to register as limited companies). Limited companies are required to have at least one director and shareholder or guarantor, which can be the same person. A company can also have multiple shareholders and guarantors.

Example

Imagine a carpenter named Lexi who wants to open her own woodworking business. Lexi wants to ensure that her business liabilities are entirely separate from her own personal finances, so Lexi decides to open a limited (LTD) company. Once Lexi registers her company, it becomes a standalone legal entity. Now, if Lexi’s company becomes insolvent, creditors likely can’t go after her own personal assets to pay off the company’s debts.

Takeaway

An LTD (Limited) is kind of like a shield for shareholders...

It helps protect shareholders so that if a company becomes insolvent, goes bankrupt, or gets involved in a lawsuit, none of the shareholders’ personal belongings will be subject to liquidation. Plus, the company’s profits will be taxed separately from the shareholders’ incomes. In short, a limited company limits shareholders’ liability by making a company a standalone legal entity.

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What is Ltd. (Limited)?

LTD (Limited) is a corporate structure that’s common in the United Kingdom. It is similar to an LLC (limited liability company) in the United States, and some U.S. states even let companies opt to use the LTD descriptor instead of LLC. In some contexts, a limited company can also refer to a broader conceptual structure that includes the German Gesellschaft mit beschränkter Haftung (GmbH) and the French société à responsabilité limitée (SARL), among others.

At its heart, a limited corporate structure protects shareholders’ personal assets in case the company becomes insolvent (can’t pay back its debts). It achieves this by turning the company into a standalone legal entity that’s separate from any individual shareholder. In this way, the company is viewed almost like a person: The company’s assets are the company’s assets, not a shareholder’s assets, so creditors can’t go after the shareholders themselves.

Think of it like this: Imagine you have a good friend named Jeff, and the two of you share a small two-person area in a larger coworking space, and both of you pay the coworking company separately. One day, Jeff stops paying his monthly fee. Since you were working in the same area, the coworking company comes to you and says that you need to pay Jeff’s fees. Doesn’t make much sense, right? Jeff is a separate person, and just because you’ve been working with him doesn’t mean you’re responsible for his financial decisions, does it?

That’s the basic idea with a limited company. Shareholders are separate from the business itself, so creditors usually can’t go after individuals when the company experiences financial troubles. Although there are exceptions to this, it stands as a general rule.

Since the company is its own distinct entity, it’s also taxed separately. Shareholder’s incomes are typically taxed independently from the taxes on the company’s profit, which can provide tax benefits.

How is a limited company structured?

Limited companies are structured as separate entities that are independent of their shareholders. Because of this, they are taxed separately, and shareholders’ assets are not typically subject to the company’s creditors.

Aside from these basics, the structure of limited companies varies by jurisdiction. However, some elements hold for most limited companies.

Typically, the shareholders of a limited company “buy-in” to the company through a private issuance or sale of shares (in a public limited company, or PLC, this can be done on the stock exchange after the company is already formed). This structure is called “limited by shares.” However, some companies may choose to have guarantors, who promise a predetermined amount of money to the company if it becomes insolvent instead. This structure is referred to as “limited by guarantee.”

Whether a company is limited by shares or guarantee, it need only have one shareholder or guarantor. In this case, he or she would own 100% of the company. For example, a freelancer could choose to form a limited company to protect him or herself from the company’s creditors and any potential lawsuits, even though he or she is the only shareholder.

Limited companies usually also have a director, who may or may not be an employee or shareholder. Directors can either be elected by the shareholders or appointed when the company is first being set up. If there is only one member of the company, then that person will also be the director.

As the director, he or she will need to follow the company’s rules, keep the company’s records up to date with any changes, file account statements and the company’s taxes (including corporation taxes), and be transparent about any personal benefit that may come to him or her after a company decision. Perhaps most importantly, they must promote the success of the company through their strategic decisions and the upholding of their duties.

Since a limited company is a separate legal entity, its profit taxes are separate from the shareholders’ and employees’ income taxes. This can sometimes provide tax benefits. For example, in a company with a single shareholder, the owner will need to pay their own salary, which is taxed separately from the company’s profits. Because of this, they can find the optimal salary to pay themselves to benefit from tax avoidance.

Typically, company profits go toward paying shareholder dividends, employee salaries, etc. A portion is kept as working capital (the company’s assets minus its liabilities), which is reinvested into the company.

What are the types of limited companies?

Internationally, there are many different types of limited companies, including the German Gesellschaft mit beschränkter Haftung (GmbH), the French société à responsabilité limitée (SARL), and the LLC in the United States.

However, broadly speaking, there are two types of limited companies most common in countries that use the “limited” designation:

Private limited company:

  • Limited by shares: In this type of company, shareholders purchase a stake in the company, and their liabilities are limited to the amount that they’ve invested (if the company goes bankrupt, the shares may become worthless, for example).
  • Limited by guarantee: Unlike a company limited by shares, this type of company has guarantors that promise to pay a predetermined amount if the company goes bankrupt.

Public limited company: A public limited is similar to a private limited company, but its shares can be sold freely to the public on the stock market.

How do you set up a limited company?

The specific steps to set up a limited company will vary by jurisdiction. However, in the UK, there are several steps that need to be taken:

  1. Choose a name: Picking a name can be a tricky part of the foundation process as it generally can’t be in use by (or too similar to) the name of another registered company in the same jurisdiction. Certain rules and restrictions may apply to what names can be used depending on the jurisdiction.
  2. Appoint a company director: The director will update the company’s records, file tax returns and account statements, and promote the company’s success among other duties. Directors can either be appointed or elected. Some companies may also appoint a secretary, but this is not a requirement.
  3. Choose the shareholders or guarantors: When founding your company, you’ll need to choose your shareholders or guarantors. Shareholders typically buy shares in a private sale, and their liabilities are limited to the amount that they invested. Guarantors don’t buy shares. Instead, they agree to pay a specific amount of money if the company goes under — the guarantee. When choosing shareholders, you will also need to identify people with significant control (PSC) over the company. This includes anyone who has voting rights or holds more than 25% of all shares, among other criteria.
  4. Write and fill out documents that show how your company will be run: To get your company started, you’ll need to prepare a memorandum of association and articles of association. The memorandum of association is signed by all the founding shareholders and guarantors and simply states that they agree to form a company together. The articles of association detail the rules and bylaws of the company.
  5. Educate yourself on the records you’ll need: All companies need to keep records of some sort, so you’ll need to figure out which ones you’ll need for your specific situation. Examples include results of votes, records of transactions when someone buys shares, and any loans or mortgages that have been secured against the company.
  6. Register the company: Once all the other pieces are in place, you’ll need to choose your company address, find your SIC code (a code that notes what industry you’re in), and register your company with Companies House, which incorporates and dissolves limited companies. These documents are complex, and are often completed with the help of a lawyer.
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