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.
“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.”
If your limited liability company gets into trouble, your personal assets are not at risk.
Public and private limited companies
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).
What is an Inc.?
‘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 may Inc. companies in the US are not public companies, i.e. they are not listed in a stock exchange.
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 Nork.
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.
Two videos, a British one followed by an American one
British Video – Different types of limited company
This video explains the differences between types of limited companies, such as private limited and public limited.
American Video – What is an LLC?
The speaker explains some of the benefits of having a Limited Liability Company, compared to a Sole Proprietorship or General Partnership.