Limited Company definition
In the business environment, we’re often surrounded by technical terms, abbreviations, and initialisms that are difficult to use and understand. However, many of these terms are an essential part of business management and must be incorporated into your vocabulary if you’re to succeed as a business owner. With this in mind, we thought it a good idea to take a more in-depth look at what a limited company is and to explore the various types of limited company too.
Private limited company definition
A private limited company is an organisation that can grant its shareholders certain legal protections according to the principles of limited liability. Limited liability states that a shareholder can only be financially liable for a company’s debts up to the value of their shares in that company.
However, private limited companies are also defined by the way in which they place restrictions on the ownership of shares. These restrictions vary from organisation to organisation and are detailed in the business’ governing regulations and bylaws. Though certain companies may choose to institute their own rules, the vast majority of private limited companies include some form of the following three laws.
1. When selling or transferring shares, shareholders must first offer them to existing shareholders.
2. Shareholders cannot place their shares on a market that is open to the general public (i.e. a stock exchange).
3. The number of shareholders cannot expand to more than 50 individuals (this figure is the most likely to vary between businesses)
Public limited company definition
In contrast to a private limited company, public limited companies issue stocks that can be bought, sold, and traded across public stock exchanges. In the UK, you can identify public limited companies by the “Plc” suffix and in the US by the “Inc.” abbreviation.
Due to the potential damage large investment in poorly managed and performing businesses could cause to the wider economy, strict regulations surround the transparency required of publically traded companies. For instance, all public limited companies have a legal obligation to publish a complete, current, and accurate account of their financial position. This ensures that the price paid for stocks in the company is more or less representative of their worth, avoiding misleading investors to the degree that was possible in the past.
Limited liability company definition
Our third kind of limited company is the limited liability company (LLC). This is a type of structure that blends the characteristics of a sole-trader with those of a corporation. For instance, an LLC is taxed in the same way as a partnership or sole-trader but also limits the liabilities of its owners – much in the same way a corporation does. This hybrid structure has a distinct set of advantages and disadvantages.
For instance, limiting the owner’s personal liability for the business’ debts and obligations is beneficial to those at the head of the company. Likewise, if there’s more than one owner, the company can distribute its profits between owners in any way it deems fit, giving the organisation more control over taxation. On the other hand, LLCs are not as permanent as other types of business and often collapse should an owner pass away. LLCs also cannot issue stocks to the public or their staff. This often limits their scope for growth.
Why become a limited company?
Among small business owners, there is often a debate as to whether it's better to operate as a sole-trader or to set up as some form of limited company. In reality, there's no definite answer. Instead, business owners need to make a decision based on their circumstances. Sometimes it will be better to run a business as a sole trader, and at other times the advantages of a limited company will outweigh the alternatives. However, there are some distinct advantages to operating as a limited company that may inform any decision you make. Below, we take a look at five reasons you may want to adopt this type of structure.
1. Protect yourself against business failure
With a limited company, the owner and the business are two separate and distinct legal entities, which allows the owner to claim limited liability for the company's debts. This feature of limited companies is possibly one of the most important developments in modern capitalism, as it encourages entrepreneurialism and experimentation that, in turn, facilitates economic growth. As individuals aren't personally responsible for all of a company's debts, they're more willing to take reasonable risks and start businesses and commercial enterprises.
2. Greater control over taxation
In many instances, you will pay less personal tax as the owner of a limited company than you would as a sole trader. This is due to the way in which limited companies pay corporation tax (currently set at 19%), and the owner can choose to minimise their tax payments by drawing a small salary and taking the rest of your income in the form of dividends.
3. Protects against hostile takeovers
Private limited companies are an excellent means of protecting a business from being acquired by outside forces through a hostile takeover. As all shares owned in the business have to be offered to existing shareholders before they can be sold to actors outside of the organisation, it’s possible to head-off takeovers to prevent the company falling into someone else’s hands. This is particularly beneficial to those who don’t want to lose control of their successful start-up or sought-after business.
4. Often easier to acquire funding
As a sole-trader, financing growth can be remarkably difficult. This is particularly true if your credit rating makes it difficult to apply for personal or business loans. Starting a limited company is one way of giving yourself a better chance of acquiring funding. For this reason, it’s a particularly popular decision among those who want to grow their business as quickly and efficiently as possible.
5. Issue stocks and shares
Finally, both private and public limited companies can issue stocks and shares to certain types of investors. This equips the business with an alternative means of raising funds and makes it less reliant on funding from traditional lending institutions. It also gives the organisation a way to finance continued expansion.