Business entities are defined based on the ownership and treatment of liabilities. The limited company is one such ownership model and it is known by several names, depending on the country where it is incorporated. For example, in the US it's called a "limited liability company" (LLC), "proprietary company" (Pty Ltd) in Australia or simply a "limited company" (public or private) in the UK and elsewhere.
One of the best advantages of a limited company is that it incorporates some features of a corporation, some of a partnership as well as some features of privately owned companies. The procedures for setting up a limited company differ from country to country and within the US, from state to state. This article provides a brief outline of each of these different versions of a limited company and how these entities can be formed.
Forming a Limited Liability Company (LLC) - Individuals who intend to form an LLC as a group are termed as ‘members' of the LLC and the steps in forming the limited company are as below:
- Create and file Articles of Association with the state's designated authority.
- Pay the fees and other charges required for registration of the entity.
- The formation and registration procedures and policies vary from state to state in the US, hence you will first need to find out the necessary information and follow it accordingly to form the limited company.
LLC pros and cons - The advantages of forming an LLC:
- Individual liabilities of members are limited, as the company is created as an entity in its own right and its individual members are not liable for debts incurred by the LLC
- No double taxation accrues to a limited company. Individual members are required to pay taxes only on their individual share of profits and earnings.
- More paperwork and regulations are involved in forming a limited company, than a partnership or proprietary concern.
- All members of the limited company should be active managers of the company, in order to avoid being taxed as an investor (non-participating member)
Forming a Limited Company in the UK and elsewhere - The limited company, as defined in the UK is the most common and popular business entity across many countries as well, particularly if they've been a former colony of the British Empire. There are two types of limited companies - public and private. Shares of public limited companies (PLC) are traded on the stock market, while a private company's shares are closely or privately held by a group of individuals (LTD). Most limited companies eventually convert to PLCs when they've grown or wish to expand and diversify and their funding needs can no longer be met by private funding alone. The process for forming a limited company is as follows:
- Register the limited company with the Companies House (in the UK) or other such designated authority.
- Registration can be done physically (in person) or through an electronic interface.
- For the latter, you may need to hire a "formation agent", lawyer, accountant or chartered secretary. These agents will help in collating the necessary documentation that needs to be filed to register the limited company.
- Documents required at the time of registration are:
- Memorandum of Association (MOA) - MOA covers name of the company, location and address of the registered office, nature of business to be carried out by the company.
- Articles of Association (AOA) - defines the rules of running the company, allocation and transfer of shares, rules of governance, appointment of directors and the number and frequency of meetings to be convened.
- Forms 10 and 12 - Form-10 includes details of the director(s), company address and details of the company secretary. The details to be mentioned are name, date of birth, address, current occupation and details of any directorships held in the preceding five years. Form-12 lists the declaration of compliance which is mandatory based on laws in force at the time of registration. This form needs to be signed by either the company secretary or one of the directors of the company or as an alternative, by the lawyer/solicitor responsible for the registration process. The form needs to be attested and witnessed by any of the following: any solicitor/justice of the peace/commissioner of oaths/notary public.
- For manual registration, standard fees of £20 or single-day registration fees of £50 should be paid. For electronic registration the fees are £15 and £30 respectively.
The process is more or less the same as far as basic documentation (MOA and AOA) is concerned, across countries. There may be small to substantial differences in the additional documentation required, depending on the bureaucracy and laws in force in the respective countries.
Once you have the basic information required to form a limited company, the actual process of formation and registration is quite simple and the fees payable are also quite reasonable. Knowing how to form a limited company is the first step to be taken by any budding entrepreneur.