You may have seen various businesses either labelled as “LLCs” or as “Ltd.” but what do they even mean? How are they different from one another, and what would be best suitable for your business? In this post, we are answering all your questions to help you decide the best solution for you and your business.
In essence, LLC and Ltd., are two different types of a company that forms the legal identity of your business. By registering your business, you qualify your business to access the following benefits;
You are eligible to receive personal liability protection;
Depending on certain factors, you might be eligible for certain tax benefits;
You can qualify for considerable loans and investments with ease;
You establish a professional brand that makes marketing your product and services easier.
What Does “Ltd” Stand For?
“Ltd” is an abbreviation for “Limited”. It refers to a private limited company whereby the legal identity of the Company is kept separate from its owners, shareholders, and employees. For example, if a company is fined for a certain violation, the owner would not be held liable to pay it from their personal wealth. Such an amount would be paid from the Company’s earnings.
What Is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a type of Company in the US that combines features of both corporations and partnerships. With an LLC, the owners of the Company are shielded from personal accountability for debts and legal claims made against the Company.
What is a Series LLC?
A Series LLC refers to a company structure where a “parent company” has one or more subsidiaries or sub-branches. These subsidiaries are separate from one other and are not liable to fulfil debts or obligations of each other. Owners can form as many subsidiaries under the Series LLC company structure. Each of these subsidiaries has its assets, members, and operations. Moreover, each branch must maintain its records, name, and bank account(s).
Differences between LTD and LLC
You may note that an LLC and Ltd are quite similar based on the above definitions. In essence, they are the same; however, they have a few key differences which make it crucial to differentiate them. One of the main distinctions is that LLCs do not pay taxes, whereas Ltd does. Moreover, an Ltd is typically formed in commonwealth countries, while LLCs are more popular in the US. In addition to these, the following aspects aid in distinguishing these types from one another.
Liability of the Owner(s):
In terms of liability in an “Ltd”, the director’s liability for company debts is limited to the amount invested. If the Company is declared insolvent, the shareholder’s personal assets are safeguarded. However, this protection does not extend to any funds invested in the Company.
On the other hand, personal liability protection in LLCs is limited. Hence, the members of an LLC may be held liable for the acts and omissions of the Company in certain cases.
Structure of Taxes and Shareholding:
As a separate legal entity, a Private Limited Company pays its taxes from the collected investments and profits earned. However, a limited liability company (LLC) can be taxed as a partnership, sole proprietor, C corporation, or S corporation.
Partners or members of the Company can elect to have the LLC treated as a separate legal entity or as a partnership, with earnings passing through to partners and taxing off their personal tax returns.
Price of Shares:
In an LTD, the price of shares is set by the Company, but in an LLC, the price depends on the market.
An LLC has a fluid ownership structure, which allows it to function with as few as one owner. However, as per English law, an Ltd must have two or more lawful persons subscribed to the Memorandum of Association of the Company.
Pros and Cons of a Private Limited Company
Depending on your situation, certain features of the Private Limited Company structure may prove beneficial or disadvantageous to you. A brief overview of the pros and cons of a Private
Limited Company is enlisted below.
Compared to other company structures, a limited company structure provides greater credibility.
Reduced National Insurance Contributions enable the owners to keep more of their profits and reinvest them in the Company.
The company directors are not held personally accountable for any potential debts or potential legal fees.
The amount of paperwork required to register and maintain a private limited company can be overwhelmingly strict and hence, expensive and very time-consuming.
Pros and Cons of a Limited Liability Company
The pros of forming an LLC are;
It is easier to attract investments from venture capitalists.
Forming an LLC is easier as it does not require as much paperwork as with other company structures.
You can declare your LLC as a “disregarded entity” and still receive the same tax benefits as a sole proprietorship.
It is easier to grow the business by way of licensing or selling portions of your shares.
The cons of forming an LLC include;
Inaccessibility towards certain tax savings. An LLC, for instance, cannot benefit from tax benefits for funding particular government initiatives.
The personal liability protection offered to the members of an LLC is limited.
What are the requirements to form a private limited company?
The requirements of forming a private limited company include the appointment of the CEO, two directors, and two shareholders.
What are the requirements to form an LLC?
The requirements for registering an LLC are enlisted as follows;
Nominating a Registered Agent:
A registered agent is a person or organization who acts on behalf of your LLC when receiving and serving legal documents. A registered agent must either be a citizen of the state where your LLC is being registered or a company with a valid business license.
Publishing Public Notice:
Before submitting their Articles of Organization, LLCs must post a public notice of their formation in their local newspaper many times. However, this requirement varies as per state laws.
Filing Articles of Organization:
The Articles of Organization is a legally binding document that provides specific details about your LLC.
Drafting and Enforcing an Operating Agreement:
You may customize your Company’s organizational structure using an operating agreement. Although it is rarely necessary, it is strongly advised that an operating agreement be formed. Your LLC’s internal policies will be outlined in the operating agreement, which may be as simple or intricate depending on the nature of your business.
Are Limited Partnerships and LLCs Different From One Another?
A limited liability corporation may have any number of members, whereas limited partnerships (LP) have both general and limited partners. Generally speaking, limited partners of an LP cannot be active participants, while all members of an LLC often have the power to govern and operate the Company.
Corporation vs. Company: What’s the Difference?
A person or group of people who engage in commercial business activities to make a profit is a company. Company is a colloquial phrase without official recognition, rules, or authorizations. Although not all companies are corporations, a corporation is usually a company.
The term “corporation” designates a certain organizational setup that makes a business a separate legal entity from its owners. They carry out the fundamental duties of a company, such as producing and dispensing goods and services and frequently do so on a much bigger scale.
A corporation engages in the public sale of stocks and shares. A framework of public ownership is thus created. Ownership and the authority to make decisions and carry out changes belong to shareholders, who control most of the Company’s shares. While the founders of a company often maintain control and ownership over the business, the general public typically has no access to share ownership.
Even if both are excellent options, you should always pick the one that best fits your Company’s demands. Make sure you thoroughly investigate the company registration procedure and adhere to all statutory requirements before registering your business.
Idealistically, each of them has advantages and disadvantages if you are a small business owner. LLC is easy to set up if you want to go with a straightforward registration process that doesn’t include complex paperwork. However, a private limited company, although complex, has its own long-term benefits.
Incorporating a company can be complicated and overwhelming, especially if you need help knowing where to begin. The best way to begin would be to educate yourself and decide what works best for your business. Various factors may affect your decision, including your location, nature of business, federal and state laws, etc.
Regardless of your choice, you must consult a lawyer when registering your business as a company. Finding reputable and qualified legal representation is made simpler and faster through LegaMart’s directory of more than 450 legal professionals from across the globe.