Definition
A Limited Company is a type of company structure where the liability of the members, also known as shareholders, is limited in relation to the company’s debts. This liability can be defined either:
- Limited by Shares: The members’ liability is confined to the amount unpaid on their shares if the company faces winding-up.
- Limited by Guarantee: Members pledge a specific amount they will contribute if the company is wound up, as dictated by the company’s memorandum.
Limited companies are the most common registered companies and are preferred due to the restricted financial risk for individuals. They can be distinguished into:
- Private Limited Companies (Ltd): These companies do not offer their shares to the general public on the stock exchange.
- Public Limited Companies (PLC): These are listed on the stock exchange, allowing the public to buy shares.
Examples
Limited by Shares:
- TechBlock Solutions Ltd: Members have purchased shares worth $100 each, with only $70 paid at inception. Their liability is limited to the remaining $30 if the company liquidates.
- Green Energy Ventures Ltd: When formed, members fully paid for their shares at $50 each. Therefore, members have no further liability on winding up.
Limited by Guarantee:
- Eco-Future Club: Members agree to contribute up to $100 each in case of liquidation, with no shared capital involved.
- Trade Association of Builders: Follows the guarantee model where each member promises to provide $250 on winding-up.
Frequently Asked Questions (FAQs)
What is the main benefit of a limited company?
The primary advantage is that shareholders have limited liability, protecting their personal assets beyond their investment in the shares or their guarantee amount.
Can a member lose more than they invested in shares?
No, in a limited by shares company, members can only lose what they have invested, which includes any outstanding amount on their shares.
Can a company be limited by both shares and guarantee?
No, since 1980, a company cannot be formed as or converted into a company limited by both shares and guarantee with a share capital.
What is the difference between an Ltd and a PLC?
An Ltd (Private Limited Company) does not publicly trade its shares on a stock exchange, whereas a PLC (Public Limited Company) allows its shares to be freely sold and bought by the public.
How can one set up a limited company?
Setting up a limited company involves registration with the relevant national registration body (like Companies House in the UK), preparing standard documentation (articles of association and memorandum of association), and fulfilling any sector-specific legal requirements.
Related Terms
- Public Limited Company (PLC): A company whose shares are publicly traded on a stock exchange, and where shareholders have limited liability.
- Shareholder: An individual or institution owning shares in a company and thereby having partial ownership.
- Winding-Up: The process of closing a company, selling assets to pay off creditors, and distributing any remaining assets to shareholders.
- Memorandum of Association: A document required during the formation of a company, stating its intentions, purpose, and the extent of members’ liabilities.
Online Resources
- Companies House (UK): www.gov.uk/government/organisations/companies-house
- Small Business Administration (US): www.sba.gov
- SEC Filings: www.sec.gov/edgar/search-and-access
Suggested Books for Further Studies
- “Company Law” by Alan Dignam and John Lowry
- “Gower and Davies’ Principles of Modern Company Law” by Paul L. Davies and Sarah Worthington
- “Mayson, French & Ryan on Company Law” by Derek French, Stephen W. Mayson, and Christopher L. Ryan
- “Company Law: Theory, Structure, and Operation” by Brian Cheffins
- “Palmer’s Company Law” by Geoffrey Morse
Accounting Basics: Limited Company Fundamentals Quiz
### What type of liability does a limited company offer to its shareholders?
- [ ] Unlimited liability
- [ ] Joint liability
- [x] Limited liability
- [ ] Conditional liability
> **Explanation:** A limited company offers limited liability to its shareholders, meaning they are only liable up to the amount they invested or guaranteed.
### In a company limited by shares, what is the maximum financial risk for a shareholder?
- [ ] The total assets of the shareholder
- [ ] The unpaid part of their shares
- [x] The amount they invested in shares
- [ ] The company's total debt
> **Explanation:** In a company limited by shares, the maximum financial risk for a shareholder is the amount unpaid on their shares, or the amount they invested.
### Which type of limited company can trade its shares on a stock exchange?
- [ ] Private Limited Company (Ltd)
- [ ] Limited by Guarantee
- [x] Public Limited Company (PLC)
- [ ] All types of limited company
> **Explanation:** A Public Limited Company (PLC) can trade its shares on a stock exchange, unlike a Private Limited Company (Ltd) which cannot.
### What type of entities typically form a limited by guarantee company?
- [x] Societies, clubs, or trade associations
- [ ] Manufacturing firms
- [ ] Retail companies
- [ ] Technology startups
> **Explanation:** Societies, clubs, or trade associations typically form companies limited by guarantee, where liability is limited to an agreed amount each member will contribute if the company winds up.
### Before 1980, could a company be limited by both shares and guarantee?
- [ ] Yes, it could
- [x] No, it could not
- [ ] Only in certain regions
- [ ] It's not specified
> **Explanation:** Since 1980, it has not been possible to form a company limited by both shares and guarantee with a share capital.
### What primary document outlines the intentions and extent of members' liabilities in a limited company?
- [ ] Financial statements
- [x] Memorandum of Association
- [ ] Shareholder agreement
- [ ] Business plan
> **Explanation:** The Memorandum of Association outlines the intentions, purpose, and extent of members' liabilities in a limited company.
### Can members of a company limited by guarantee hold shares?
- [ ] Yes, they can
- [x] No, they cannot
- [ ] Only if specified by the board
- [ ] Only in public companies
> **Explanation:** In a company limited by guarantee, members cannot hold shares as these companies do not have a share capital.
### Public Limited Companies must adhere to stricter regulations than Private Limited Companies because:
- [ ] They have more employees
- [x] They trade shares on the stock exchange
- [ ] They pay higher taxes
- [ ] They have more directors
> **Explanation:** Public Limited Companies must adhere to stricter regulations since they trade shares on the stock exchange, ensuring transparency and protecting public investors.
### To set up a limited company, one must register with:
- [ ] Local bank
- [ ] Trade association
- [x] National registration body (e.g., Companies House)
- [ ] Fiscal authority
> **Explanation:** Setting up a limited company entails registration with a national registration body, such as Companies House in the UK.
### Which of the following best describes a Private Limited Company (Ltd)?
- [ ] It is listed on a stock exchange
- [ ] Members' liability is unlimited
- [x] It does not trade shares publicly
- [ ] It can only operate within its country of registration
> **Explanation:** A Private Limited Company (Ltd) does not trade its shares publicly on the stock exchange.
Thank you for taking a deeper dive into the concept of a Limited Company through this informative guide and challenging quiz. Continue expanding your business and financial knowledge for greater success!
