We have all seen it, heard it, or read about it, but do most of us really know what it means? This question applies to the most common terms used in business. Whether its financial terminology used by stock traders or the abbreviations listed after most companies’ names, we all had a run-in with these terms but couldn’t clearly explain what they mean. This article will bring some clarity to one of these terms we hear quite often and that is LTD.
Basics of an LTD
Before getting into the specifics of how LTDs operate and their benefits, we need to learn what exactly it is. An LTD or a “limited company” refers to a company structure that limits the personal liability of the corporation’s shareholders. Unlike an LLC where the members of the Limited Liability Company are protected from liability, in an LTD the shareholders are the ones protected from liability. You can see the abbreviation LTD at the end of companies operating out of the United Kingdom, Australia, India, and many other Commonwealth countries.
Most LTDs have one or more members or shareholders who buy a part of the business. The ownership of these businesses is easily transferable. A limited company is its own legal entity. LTDs are run by directors who are considered company employees are responsible for the administrative tasks of the corporation. In an LTD structured company, the finances of the company are separate from their owners and are taxed separately. The company technically owns all the profits of the business and pays taxes on them. The company distributes a portion of their profits to shareholders as dividends using the rest of the money as working capital.
Setting up a company as a private limited company, separates the business from the people who own it and or run it. As a self-employed sole trader, you are the business and are liable for all the good and the bad of your business. In an LTD structure, the limited part refers to the liability of the business. When you establish an LTD company, you are signifying the business as a completely separate institution. The company becomes its own legal property and thus any debts incurred by the business do not transfer over to you.
Benefits of an LTD
As mentioned above the biggest advantage of an LTD is the protection from liability it provides to the owners of the company. But that’s not the only benefit you will get from forming an LTD. Since an LTD business is a separate entity, it can be traded or bought and sold like any other commercial asset in the market. When the founder of an LTD decides to transfer ownership, the acting director of the limited company takes over ownership of the LTD and has right to allocate funds and resources. The founder cannot reclaim his position without the approval of the current owner.
Another wonderful advantage provided by LTDs is one that is similar to branding. Technically your LTD protects your company’s name. if you incorporate your business and register it as an LTD, then no other organization or business can use that name for trading. This protects you from anyone using your name or brand to benefit or profit from what you built. One of the major remaining advantages of an LTD is the tax benefits it provides. Through the use of dividend payouts, you can greatly reduce your companies’ taxes and increase your profits. The tax break provided can result in great savings for the company which in return leads to bigger sums being left for the operation.