What is a limited company?

A Limited Company is a private company whose owners are legally liable for its debts only to the extent of the guarantees they have agreed to or the capital they have invested in it, i.e. a limited company may be limited by shares or by guarantee. A company is any legal entity that buys and sells goods and services, usually in the pursuit of profit.

In a company limited by guarantee, each stockholder is responsible for paying debts up to a certain amount if the business goes bankrupt.

If there is no guarantee agreement, the shareholders are only liable for the money they invested in its shares (stocks). For example, if I own 100 shares in company XYZ Limited, my only risk is the value of those shares. If XYZ goes bankrupt, my home and other personal assets are not at risk.

According to the British Government:

“A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.”

“Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.”

Man holding a 'limited liability' shield, depicting the protection that a Limited Liability Company offers.
If your limited liability company gets into trouble, your personal assets are not at risk.

Public and private limited companies in the UK

In the United Kingdom (UK), there are two main types of businesses limited by the shares invested in them – public limited and private limited companies.

To become a shareholder of a private limited company, you would need to be accepted by its shareholders in a private agreement. This is not the case with a public limited company, where any member of the public can buy and sell its shares at a stock exchange.

Most countries across the globe have private and public limited companies. In the UK, a public limited company is known as a PLC, France S.A. (also in Spain, Poland and Romania), Germany AG, and in Italy S.p.A.

A private limited company is known as an Ltd. in the UK, GmbH in Germany, SARL in France, s.r.l. in Italy, and Pty. Ltd. in Australia (in Australia, a business with just ‘Ltd.’ at the end is a public limited company).

Inc. in the US

‘Inc.’ is the contraction (shortened form) of ‘incorporated’. It is a term used in the United States for a separate legal entity whose directors and officers buy shares in the business and are only liable to the extent of the money they invested in those shares.

The term ‘corporation’ is more common in the US than limited company, because corporations have limited liability.

Many people outside the US mistakenly believe Inc. is the equivalent of the UK’s PLC. This is not the case, because many Inc. companies in the US are not public companies, i.e. they are not listed in a stock exchange.

LLC in the US

Probably the most similar equivalent in the United States to a British Ltd. company (private limited company) is an LLC (limited liability company).

If you plan to set up a company in the US and raise venture capital or eventually go public, don’t set it up as an LLC. It is not possible to do an initial public offering (IPO – to go public) with an LLC, mainly because of state laws. It would first need to convert to a corporation with potentially undesirable tax consequences.

The Cornell University Law School defines a Limited Liability Company (LLC) as follows:

“A type of business organization that offers the limited liability of a corporation and the tax benefits of a partnership. The owners of an LLC are referred to as ‘members’, whose rights and responsibilities in managing the LLC are governed by an operating agreement. An LLC is legally formed by the filing of a document called the articles of organization with a state official, usually the Secretary of State.”

History of limited liability

Monastic communities and trade guilds in 15th century England had limited liability with commonly held property.

In the 1600s, joint stock charters were awarded by the British crown to the East India Company and other monopolies.

The first modern limited liability law was enacted in 1811 in the state of New York.

In the UK, it became simpler to incorporate a joint stock company after the Joint Stock Companies Act 1844.

However, the Limited Liability Act 1855 made investors is such companies personally liable. At the time, many people thought that if the directors of a company were not personally liable, business standards would decline.

Following the Limited Liability Act of 1855 in the UK, the Companies Act 1862 established a full-fledged legal framework for limited companies, allowing for more streamlined company registration and management, and reinforcing the concept of limited liability for shareholders.

The concept of limited liability significantly contributed to the industrial revolution by encouraging more public investment in burgeoning industries, as investors were assured that their personal assets were protected from business debts.

UK’s largest private & public limited companies

  • Private Limited Company

The UK’s largest private limited company is Ineos Group Limited, a multinational chemicals company, which was founded and is headed by Sir Jim Ratcliffe. It has about 26,000 employees and revenue of $61 billion (2022).

  • Public Limited Company (PLC)

The UK’s largest public limited company is Shell plc, an oil and gas multinational with a primary listing on the London Stock Exchange. It also has a secondary listing on the New York Stock Exchange and Euronext Amsterdam. It has approximately 86,000 workers and revenue of $381 billion (2022).

Video – What is a Limited Company?

This video, from our YouTube partner channel – Marketing Business Network, explains what a ‘Limited Company’ is using simple and easy-to-understand language and examples.