Ltd vs LLC (Every Difference You Should Know)
Once you've decided to start a business, there are several factors to consider when choosing the right entity name—specifically, whether to use LLC, Ltd., Corp., or Inc. after your business name.
As a Mergers and Acquisitions specialist, I’ve helped many entrepreneurs form their companies and have become familiar with how each designation works.
This article will help you distinguish between LLC, Limited, Corporation, and Incorporated. More importantly, it explains how each term legally defines and differentiates your business.
Read on to choose wisely and set your business up for success.
Quick Summary
- An LLC (limited liability company) is a business structure, while Ltd. (limited) is a designation used after incorporation.
- LLCs enjoy pass-through taxation, whereas Limited Companies face both corporate and individual taxation.
- With 1.4 million new U.S. businesses launched from March 2021 to March 2022 (per the SBA), entrepreneurs should evaluate whether an LLC or Ltd. structure aligns with their goals.
- Both offer personal liability protection, but in my experience, LLCs provide more management flexibility compared to the more rigid structure of a Limited Company.
At a Glance: LLC and Ltd
Ltd., the abbreviated form of limited, is a designation in the UK included after a company's name once it becomes incorporated.
In the United States, a limited company is commonly known as a corporation, a business structure that is legally regarded as an independent entity. The company name may be followed by Corp., Corporation, Inc., or Incorporation.
An LLC, or limited liability company, is a type of business entity that offers personal liability protection to its members, benefits from pass-through taxation and features a more flexible operational structure. The company name is designated by L.L.C or LLC.
Key Differences
An LLC and a limited company or corporation differs in the following respects:
1. Ownership and Management
- Limited (Ltd.): A corporation is owned by shareholders who invested capital into the business and own a percentage of the company. The shareholders elect a board of directors to manage the company by implementing and executing business plans and decisions.
- Limited Liability Company: An LLC may be owned by a single person, a partnership, or by several individuals, referred to as members. Control and management of an LLC is less structured and more flexible than a limited company. It may be decided among the members through an operating agreement.
2. Taxation
- Limited (Ltd.): A corporation is required to pay taxes on its company profits, and shareholders are subject to tax at the individual level based on their received dividends. This is referred to as double taxation.
- Limited Liability Company: Given that 33.3 million small businesses, constituting 99.9% of all US businesses, face various taxation challenges, I advise new business owners and entrepreneurs to consider forming an LLC. This structure benefits from pass-through taxation, allowing profits to be reported and taxed only on the individual returns of the members.
3. Regulation
- Limited (Ltd.): Corporations are primarily authorized and regulated by state law governed by the Model Business Corporation Act. Corporations offering stock are required to register with the Securities Exchange Commission (SEC) [1].
- Limited Liability Company: LLCs need to file with the Secretary of State or its equivalent agency before legally operating within the state. In the absence of an Operating Agreement, state law ruling apply by default. I encourage business owners to draft an operating agreement in order to maintain control of their company and avoid the state ruling since it may not serve the interest of their LLC.
Which Form of Company Suits My Business Best?
The form of company that suits your business best would be determined by the features, structure, and advantages and disadvantages of an LLC and a Limited Company.
"Start where you are. Use what you have. Do what you can."
– Arthur Ashe, Professional Tennis Player
Advantages of an LLC
- Personal Liability Protection: LLC members are not personally liable for company debts, as business and personal assets are legally separate.
- Pass-through Taxation: LLCs don’t pay corporate taxes—profits pass through to members’ individual tax returns.
- Flexible Management: Members can run the business themselves or appoint someone. Many of my clients assign management roles to experienced members.
- Fewer Compliance Requirements: LLCs aren’t required to have boards or hold annual meetings.
Disadvantages of an LLC
- Ownership Transfer: Requires unanimous member approval, making transfers more complicated.
- Limited Lifespan: An LLC may dissolve if a member leaves, retires, or passes away.
Advantages of a Limited Company or Corporation
- Personal Liability Protection: Shareholders’ risk is limited to their investment, as the corporation is a separate entity.
- Unlimited Shareholders: Corporations can raise capital by allowing unlimited shareholder investments.
- Transfer of Ownership: Shares can be sold easily without needing approval from other owners.
- Perpetual Existence: A corporation continues to exist regardless of changes in ownership.
- Stock Sales: Corporations can issue and sell stock to raise funds.
Disadvantages of a Limited Company or Corporation
- Double Taxation: Profits are taxed at both corporate and individual levels.
- Strict Compliance: Must appoint directors, hold annual meetings, and file regulatory documents.
Related Article: LLC vs Incorporation
FAQs
Is LTD Private or Public?
Ltd can be both private and public. Ltd (Private Limited Company) is owned by a limited number of shareholders, while PLC (Public Limited Company) has shares that on the stock market.
Can an LTD BeTaxed as an S Corporation?
Yes, an Ltd can be taxed as an S Corporation by filing form 1120-S with the IRS. As an S Corporation, your company will avoid double taxation.
References:
1. https://www.law.cornell.edu/wex/corporation
When I first started my business, I had no idea whether to go for an LTD or LLC. This article would’ve saved me a ton of research.
The flexibility in management for LLCs really stands out to me. I’ve been leaning towards an LLC because I want more control over day-to-day operations.