Everything You Need to Know About Forming an LTD

Not sure what an LTD is? Even less sure if you should form one? Don't worry -- we've got you covered.

May 9th, 2019   |    By: The Startups Team

Business incorporation! It’s not the sexiest topic — but it’s very important. So let’s take a look at one type of business incorporation — LTDs — and see how they compare to a couple others. Bear with us, here. We promise you’ll be glad you paid attention.

1. What is an LTD?

LTD stands for “limited,” and it’s a type of business incorporation used primarily in the UK, Canada, and Australia. When you see it — or “LTD” — as a suffix to an official company name, it indicates that it is a private “limited company.” That means that if anything happens to the company — like bankruptcy or getting sued, for example — then the investors are only responsible for the capital that they originally invested. This arrangement protects the personal assets of investors.

In the United States, “limited liability companies” or LLCs are similar, with differences outlines in the comparison section, below.

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2. How does an LTD work?

Let’s first take a look at the nitty-gritty. How does an LTD work? We’re going to break down LTD structure and the different types of LTDs that are out there.

What is the structure of an LTD?

There are four elements to the structure of a Ltd.: Director(s), Company Secretary, Shareholders, and a registered office.

Director(s) Every LTD has to have at least one director, but can have as many as the company choose. The director’s job is to manage the day-to-day aspects of the company, including the finances. In the UK, they’re held to the rules of the Companies Act and can be found personally liable if the company breaks the law in any way.

Company Secretary The company secretary is the other essential position for an LTD They’re expected to take care of all administrative tasks for the company. It’s also their job to make sure the company is following the law and to keep the director(s) apprised of any changes to the law.

Shareholders Some LTDs have shareholders, although not all do. Shareholders are investors — people who hold shares in the company.

Registered Office In the UK, it’s required that an LTD have a registered office address in England or Wales. Scottish and Irish companies have to register in offices in Edinburgh or Belfast, respectively.

What types of LTDs are there?

There are three different types of LTDs in the UK.

Limited by shares A company that is limited by shares is owned by its shareholders. Each of those shareholders is only liable for the number of shares they own.

Limited by guarantee A company that is limited by guarantee doesn’t have shareholders, which is a common organizational structure for charities. Their liability is limited to the capital invested by principals.

Unlimited An unlimited company does have shares and its members aren’t liable.

What are the advantages and disadvantages of a LTD?

Advantages

1. Liability is shared. The first advantage of an LTD is the most obvious: liability is shared amongst multiple shareholders. That means no one person is responsible for anything bad that happens.

2. Investors are only responsible for their investment. Similarly, if an LTD becomes insolvent, each investor loses only as much as they invested.

3. There are tax benefits. An LTD is only taxed on its profits. That keeps the rate around 21 percent, whereas sole owners or partnerships can expect taxes as high as 40 percent.

Disadvantages

1. It makes investors wary. An LTD incorporation may make investors wary, to the point where the primary director may be required to make a personal guarantee before investors will come on board.

2. All partners have to agree. If an LTD wants to sells shares or dissolve, all of the investors have to agree. This makes it difficult sometimes to keep things moving.

3. It can be tricky to do business in the US. When an LTD from a country outside the US wants to business inside the US they have to register in each state that they’re doing business in. So if they’re expanding into California, they register there. Headed to Montana? Register again. This can be a big hassle particularly for online companies, which aim to serve a larger market.

How to set up an LTD

In the UK, private limited companies have to register with the Companies House. This process is called “incorporation.”

In order to register, you need the following: A company name. When you’re picking a company name, you can’t just choose anything you want. There are a few rules around names, including that it not be offensive, not be too close to another company’s name or trademark, and it can’t actually be another company’s name or trademark.

A physical address. The physical address of your company has to be in the country your company is registered in. It can also be your home address or the home address of the member of your company who will be managing your Corporation Tax.

A minimum of one director. A director is an important part of an LTD, as they’re in charge of running the company. With that in mind, they have to be age 16 or older, have a UK address (but not necessarily live in the UK), a provide an address.

A description of the company’s shares, with at least one shareholder. Figuring out how to issue your shares is the topic for a whole other article. But the least you need to know is that you’ll have to figure out how many there are, what they’re worth, and who has what percentage.

1. Your SIC code.SIC” stands for “standard industrial classification of economic activities.” It’s the code the government uses to determine what type of company you’re running.

2. You memorandum and articles of association, which are an agreement from shareholders to create the company and the rules for the company.

3. Details about anyone who has more than 25 percent of control over your voting rights. They’re called “people with significant control” (PSCs).

Once you have all of these compiled, you’re free to register you company. Registration can be done online and costs £12. You can also register by post using this form, which costs £40. (If you don’t want to use “limited” in your company name, you have to register by post.) You can also use an agent or use third-party software to register.

LTD compared with other types of business incorporation

LTD is just one type of business incorporation. Here are the main differences between an LTD and a few other common types of business incorporations.

LTD vs. Inc.

“Inc.” simply stands for “incorporated” and can be used interchangeably with LTD. It’s a corporation run by directors and officers, who are elected by shareholders.

LTD vs. LP

“LP” stands for “limited partnership.” As the name suggests, it’s another form of partnership incorporation. Like LTDs, there are managers and investors. However, unlike LTDs, LPs require active managers called “general partners” and passive investors called “limited partners.” They also don’t protect the general partners from liability.

LTD vs. LLC

LLC stands for "limited liability company.” It’s more commonly used in the US and this type of business is owned by members, not shareholders. Like an LTD, owners of LLCs are protected from liability and offer stock. However, unlike LTDs, the earnings and losses of the company go through the owners, who report them on their personal tax returns.

The owners of LLCs are also considered “self-employed” and therefore have to pay self employment tax. They are incorporated based on different rules state-to-state, and when a member leaves, the remaining members dissolve the company and have to decide if they want to make a new one.

Private LTD vs. Public LTD

The most basic different between a private LTD and a public LTD is the fact that, in the former, ownership is in private hands while in the latter, ownership is traded publicly. There are also differences in structure: A private LTD can be formed with as few as two people, while a public LTD must have at least seven and there’s a cap of 200 people on a private company, with none on a public one.


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The Startups Team

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