Learn what a private limited company is and what Ltd. stands for. Discover advantages to a private limited company compared to a sole proprietorship or corporation.
Updated: 11/21/2023
Private Limited Company | Ltd. Meaning & Advantages
Table of Contents
- Definition of a Private Limited Company
- Advantages of a Private Limited Company
- Disadvantages of a Private Limited Company
- Lesson Summary
Frequently Asked Questions
What type of business is a private limited company?
A private limited company is different from public trade companies in that the number of shareholders is limited to fifty. A key characteristic of this legal entity is that these shareholders have limited liability.
What does Ltd. mean for a business?
For a busines, Ltd. means that the shareholders have limited liability. As such, their assets cannot be confiscated to recover debts.
What is the meaning of the abbreviation Ltd.?
The abbreviation Ltd. stands for "limited". It is used to describe companies whose shareholders have limited liability to the value of shares.
Table of Contents
- Definition of a Private Limited Company
- Advantages of a Private Limited Company
- Disadvantages of a Private Limited Company
- Lesson Summary
What does Ltd. stand for? A private Ltd. company is owned by a small group of entities or individuals with strict control of the businesses. What is Ltd.? Ltd. stands for limited company. A private limited company is defined by the number of shareholders, the liability of owners, and trading stocks. Like other companies, private limited companies must submit financial statements every financial year.
What exactly is the meaning of Ltd.? The essential characteristics of a limited company are as follows:
- The owners of a private company have limited liability. The company's liability cannot be assumed as theirs.
- A Ltd. company has a limited number of shareholders.
- The owners are not allowed to sell shares/stocks publicly.
- The number of owners is limited to fifty shareholders.
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What is Ltd. in business? Ltd. in business means the shareholder has limited liability to the value of stock. A Ltd. business has general advantages that set them apart from unlimited enterprise. Essentially, there is a need to consider what Ltd. is in the business to understand these benefits. A Ltd. business combines the limited liability of a corporation with the intimacy of a sole proprietorship or small partnership. This aspect appeals to businesses because of flexibility. For instance, the Ltd. company can use different tax regimes. In that regard, it has an opportunity to be considered as a flow-through entity.
Moreover, the Ltd business has protection because of limited liability. The owners are protected since the company is considered a separate legal entity. Legally, a legal entity can own, sue and operate independently. As a result, the owners are free from its liability.
Limited Liability
Ltd. business ensures owners have limited liability. Owners' resources will not be touched when a company owes money to other entities. To recover the debts, the authorities will only confiscate resources owned by the entity. The shareholders will lose only their stock investments but not their savings or investments. In contrast, sole proprietorships have unlimited liability. As such, the owners are not protected in case of a lawsuit. Therefore, their assets can be used to cover the damages.
However, the protection in the Ltd. business is negated in case of fraud. When a company is involved in a legal battle, a court can decide to use its resources to recover the debt. The owners' assets are protected. However, if a member conducts fraud and allows their perpetuation, the law will not protect their resources.
Restricted Trade of Shares
A Ltd. business enjoys restricted trade of shares. Restricting trade in shares is critical because it ensures that the possibility of a hostile takeover is eliminated. Notably, what is limited in business are the shares. Furthermore, shareholders are limited in how they can sell their shares. Subsequently, If one wants to sell shares, they will have to trade with another member. As a result, one cannot trade stock to outsiders.
Moreover, the shareholders have to agree on how to transfer the shares. This action reduces the possibility of a hostile takeover. Essentially, a hostile takeover is when powerful businesses buy many stocks to control another business. When this is the case, the shareholders lose control of the business. This is not likely to happen in private limited companies.
Continued Existence
Unlike a sole proprietorship, a Ltd. business is a separate legal entity. Typically, private companies can exist when the owners die. This is not the case in a sole proprietorship, where the owners control all business activities. Lack of legal separation connotes that the business will exist as long as the owner does. However, the Ltd. company is like a corporation, which means that it will continue its operation in case of the owner's demise.
Tax Breaks and Accounting
Benefits of tax breaks available to Ltd. business are not accrued by a sole proprietorship. A sole proprietorship must pay 20% of earnings as taxes. However, a limited company is not required to pay high percentages of their earnings as taxes. The law identifies owners as employees and employers. As such, they can take small salaries to avoid high personal taxes. As an employer, the owners will enjoy dividends with low tax rates. However, unlike a sole proprietorship, private limited companies must file financial statements within nine months after the end of the financial year.
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A private company cannot sell shares publicly. This Ltd. business requires shareholders to agree on how to trade the shares. The limited nature of the business restricts the owner's control on trading stocks. A private company cannot generate a lot of capital by publicly selling shares. Also, the number of shareholders is limited to fifty. Therefore, it has a limited chance of growth. Business growth is critical because it increases the likelihood of making huge returns. However, without enough capital, a private company is limited in ways it can expand its operations.
Shares Cannot be Publicly Traded
Private limited company's shares are not traded publicly. In contrast, a public company can sell shares publicly, allowing it to generate a lot of capital. The capital generated by a private company largely depends on the fifty members. The number of shareholders is limited to fifty. Although a Ltd. business has many ways of raising money, shareholders may have difficulties liquidating holdings in shares. In particular, shareholders must agree on how the share will be traded.
Restricted Number of Shareholders and Limited Growth
A private limited company is restricted in terms of the number of shareholders. Legally, a private limited company must have no more than fifty shareholders, which limits the amount of capital that the business can generate. Ltd. business must have enough money to operate. However, the amount of capital generated by the shareholders is restricted due to the limited number of shareholders. When there is a restriction in the number of shareholders, the company is limited because it cannot raise funds. It creates financial challenges for the business. As a result, the business has limited growth and cannot expand its operations. Limited growth means that the company cannot reach new markets.
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A Ltd. company is a legal entity owned by a small group of individuals. A private limited company is restricted in terms of the number of shareholders. Generally, a shareholder is not at liberty to trade their shares without consulting others. These shareholders have limited liability to the value of shares. In particular, they cannot sell shares publicly and must consult others before transferring stock. This aspect eliminates the possibility of a hostile takeover. In contrast, sole proprietorships are owned by a single individual, and they have unlimited liability. This means that sole proprietors are not protected against lawsuits and are personally responsible for the company's business debts. As such, their assets can be recovered in case of losses, damages, or debts.
Similar to other companies, private limited companies must submit financial statements every financial year. As a legal entity, private limited companies continue to exist after their owners' deaths, unlike sole proprietorships, where the single owner is essential for the company's continued existence. Private companies ensure tax breaks and limited liability status. However, this limited liability protection may be negated in case of fraud. Notably, a private company has limited ways of generating capital because of a limited number of shareholders and restrictions in selling stocks. Because the number of shareholders is limited to fifty, a private limited company has a restricted chance of growing and expanding its operations.
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Video Transcript
What is a Private Limited Company?
A private limited company, or LTD, is a type of privately held small business entity. This type of business entity limits owner liability to their shares, limits the number of shareholders to 50, and restricts shareholders from publicly trading shares.
Advantages
Let's look at some of the advantages of having a private limited company.
Limited Liability
During the recent recession, which lasted from December 2007 - June 2009, many businesses experienced financial problems and permanently closed. One advantage of owning a private limited company is that the financial liability of shareholders is limited to their shares. Therefore, if a private limited company was in financial trouble and had to close, shareholders would not risk losing their personal assets. Although, perpetrating a fraud related to the private limited company would negate an owner's limited liability protection.
Restricted Trade of Shares
The restriction placed on the sale or transfer of shares may be considered an advantage or disadvantage, depending on your outlook. It is an advantage to some shareholders because shareholders who want to sell shares cannot sell them to outside buyers. Shareholders must also agree to the sale or transfer of shares; therefore, the risk of hostile takeovers is low. The restriction placed on the sale of shares is a disadvantage because shareholders have limited options for liquidating shares.
Continued Existence
Another advantage of a private limited company is its continued existence, even after the owner dies or leaves the business. Private limited companies are incorporated. When a business incorporates, it becomes an independent legal entity, meaning it is able to sue or own assets separate from the company owner. A private limited company differs from a sole proprietorship in that the latter is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence.
Tax Breaks
Private limited companies also enjoy tax advantages. For example, their corporate taxes may be lower than those paid by other types of businesses. Financial statements for private limited companies must be filed no later than nine months after the fiscal year ends. The first accounting period begins the same day that the business is incorporated. When pursuing tax advantages, private limited companies must keep accurate records.
Disadvantages
While owning a private limited company has several advantages, there are some disadvantages associated with it as well, such as the inability to publicly sell shares and limits on growth. Since the shares of a private limited company are not sold on stock exchanges, owners are only able to raise a limited amount of capital. Growth may be limited by restricting the number of shareholders to 50.
Lesson Summary
Let's review. A private limited company, or LTD, is a type of privately held small business entity, in which owner liability is limited to their shares, the firm is limited to having 50 or fewer shareholders, and shares are prohibited from being publicly traded.
A company becomes an independent legal structure when it incorporates. Private limited companies pay low taxes. They must also file their financial statement no later than nine months after the end of the fiscal year. Private limited companies differ from sole proprietorships, which are owned by individuals who are responsible for the business debts of their companies.
Advantages of owning a private limited company are:
- Limited liability
- Restricted sale or transfer of shares
- Continued existence
- Tax breaks
Disadvantages of owning a private limited company are:
- Shares cannot be sold on a public stock exchange
- Limited growth and restricted number of shareholders
Key Terms
- Private limited company: a type of small business where the owners are liable only to their shares and not the business' debts
- Incorporate: when a company becomes an independent legal structure separate from its owner and is able to sue and own assets
- Sole proprietorship: a company that depends on and is owned entirely by individuals who are responsible for the business' debts
Learning Outcomes
Completing this lesson should help you do the following:
- State the qualities of a private limited company
- Discuss the benefits and drawbacks of a company being listed as a private limited company
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