Ltd vs LLC (Every Difference You Should Know)
Once you've decided to start a business, there are several factors to be considered when trying to determine which entity name is best for your company. More specifically, which title is appropriate to attach to your business name, LLC, Ltd., Corp. or Inc.?
As a Mergers and Acquisitions specialist, I assisted several entrepreneurs form their businesses and I became familiar with how each type of company is designated.
The article will help you distinguish between LLC, Limited, Corporation, and Incorporated. More importantly, it will explain how each designation legally identifies, defines, and differentiates your business name.
Read on to find out how to choose wisely and set your business up for success.
Quick Summary
- An LLC, or limited liability company is a form of business structure, while Ltd., or limited, is a designation for a company once it becomes incorporated.
- An LLC benefits from pass-through taxation, while a Limited Company is taxed at both the corporate and individual levels.
- Reflecting on the 1.4 million new US establishments identified by the US Small Business Administration from March 2021 to March 2022, entrepreneurs should carefully consider whether an LLC or Ltd structure best suits their business needs in this burgeoning market.
- While both business forms offer personal liability protection, in my opinion, LLC is better because it offers more flexibility in management, while a limited company is more structured.
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: Since the assets of the company are legally separate from the finances of the members, LLC owners benefit from personal liability protection.
- Pass-through taxation: An LLC is not required to pay taxes on the corporate level, and only the members are levied on their individual returns.
- Flexible management and organization: The members have the option to manage the company collectively or appoint a professional individual or service to run the LLC. Most of my business colleagues who operate an LLC manage their company by appointing other members who are most familiar with the line of business.
- Less compliance requirements: LLCs are not required to appoint board members and conduct annual meetings.
Disadvantages of an LLC
- Transfer of ownership: The transfer of ownership in an LLC is more difficult to process since all members have to approve the procedure.
- Limitation of existence: Once the purpose of an LLC has been fulfilled, or if a member retires or passes away, the company may be terminated.
Advantages of a Limited Company or Corporation
- Personal liability protection: A corporation is regarded as an independent entity separate from its owners. This affords the shareholders personal liability protection and their accountability is limited to the invested capital on the company.
- Unlimited shareholders: A corporation has the option to have unlimited shareholders to invest and increase the company profits.
- Transfer of ownership: Shareholders may simply sell their stocks if they intend to leave the company without approval from the rest of the owners. Whenever my clients decided to venture with a different line of business, they simply had to sell their shares to other members of the company.
- Indefinite life: A corporation can exist indefinitely as long as the company has stockholders and a working capital.
- Sale of corporate stock: A corporation has the option to offer and sell corporate stocks to increase the profits of the company.
Disadvantages of a Limited Company or Corporation
- Double taxation: A limited company is subject to tax on the corporate level as well as on the individual returns of its shareholders.
- Compliance requirements: Corporations are required to elect or appoint a board of directors, conduct annual meetings, submit compliance reports and register with regulatory agencies.
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
