What is a limited liability company (LC)?
A public limited company (LC) is a general form of incorporation which limits the amount of liability assumed by the shareholders of the company. It refers to a legal structure which guarantees that the responsibility of members of the company or subscribers is limited to their participation in the company by means of investments or commitments. In the legal sense, a public limited company is a person.
The naming convention for this type of business structure is commonly used in the United Kingdom, where the name of a business is followed by the abbreviation “Ltd.” In the United States, public limited companies come in many forms, including the limited liability company (LLC).
[Important: Several variations of limited company exist around the world and are followed by standard abbreviations including Ltd., PLC, LLC, and AG to name just a few.]
How a public limited company works
As indicated, in a public limited company, the assets and debts of the company are distinct from those of the shareholders. Consequently, if the company experiences financial difficulties due to normal commercial activity, the personal assets of the shareholders are not likely to be seized by the creditors.
Ownership of the public limited company can be easily transferred, and many of these companies have been passed down from generation to generation. Unlike a public company in which anyone can buy shares, membership in a public limited company is governed by the rules and law of a company.
A public limited company can be “limited by actions” or “limited by a guarantee”. Limited by shares, a company belongs to one or more shareholders and is managed by at least one director. In a limited warranty scheme, a company belongs to one or more guarantors and is managed by at least one administrator.
The main advantage of a limited liability company is the separation of company assets and income from owners and investors through limited liability. This means that if a business goes bankrupt, shareholders cannot lose as much as their initial investment and no more – creditors or other stakeholders cannot claim the owners’ assets or personal income. Due to limited liability, investors are more willing to risk capital as their losses are limited in this sense.
Key points to remember
- A limited liability company (LC) is a general term for a type of business organization in which the assets and income of the owners are separate and distinct from the assets and income of the company, called limited liability.
- For this reason, potential homeowner losses are limited to what they have invested and personal assets and income are out of range.
- Several variants of public limited companies exist worldwide and are followed by standard abbreviations, including Ltd., PLC, LLC and AG to name a few.
There are many advantages to filing as a public limited company. They include:
- A public limited company and the people who manage it are legally separate.
- A public company structure provides a firewall between the finances of the company and its owners.
- A public limited company is authorized to own assets and to keep all profits made after tax.
- A public limited company can conclude its own contracts.
To benefit from this privilege, public limited companies in the United Kingdom must pay various taxes, such as value added tax (VAT) and capital gains tax, and must contribute to national insurance. Public limited companies in the United Kingdom receive favorable tax treatment when their income reaches a certain threshold (around GBP 20,000). At this level, the corporate tax rate is a flat rate of 19% on profits.
In comparison, unincorporated businesses, such as sole proprietorships and traditional partnerships, do not place complete limits on the liability of owners because there is no legal distinction between the business and its owners. If such a business became insolvent, its owners would be responsible for its debts.
Variations of the limited liability company
The structures of public limited companies are codified in many countries, although the regulations governing them can differ considerably from one country to another. For example, in the UK there are private companies and public companies.
Public limited companies are not authorized to offer shares to the public. These are however the most popular structures for a small business. Public limited companies (PLC) can offer shares to the public to raise capital. These shares can be traded on the stock exchange once the total share value threshold is reached (at least GBP 50,000). Such a structure is widely used by large companies.
In the United States, a public limited company is more commonly known as a company (corporation) or incorporated company (Inc.). Some states allow the use of Ltd. (limited) after a company name. Such a designation depends on the filing of the appropriate documents; Simply adding the suffix to the name of a company does not protect against liability. In the United States, limited liability companies are required to file corporate tax with regulatory authorities each year. Limited liability companies (SARL) and limited liability companies have different structures.
Many countries distinguish between public limited companies and public limited companies. For example, in Germany, the designation Aktiengesellschaft (AG) is reserved for public companies which can sell shares to the public while GmbH is intended for public companies which cannot issue shares.