An ocean isn’t the only thing that divides American business practices from their UK counterparts. While entrepreneurs in the US have enthusiastically embraced the limited liability company (LLC) since its introduction in Wyoming in 1977, the British have long favored the limited company (Ltd.) structure, a business legal form that dates back to the Victorian era.
Both business formations are the most popular choices in their respective countries for a small business owner. Their fundamental differences reveal more than just legal divergence—they reflect distinct cultural attitudes toward entrepreneurship, business risk, and corporate governance that continue to shape how businesses operate on both sides of the pond.
What is an LLC?
A limited liability company (LLC) is a US legal structure that combines the personal liability protection of a corporate entity with the tax advantages and operational flexibility of a partnership or sole proprietorship. You can organize an LLC to suit different business needs—from a simple, single-member LLC business structure for solo entrepreneurs and freelancers, to multi-member LLCs for partnerships. Some LLCs can even accommodate multiple business segments that operate independently under one umbrella while maintaining separate liability protection for each.
Some important benefits of an LLC include:
-
Limited liability. An LLC shields owners (called members) from being personally responsible for most business debts and legal obligations. This means that LLC members’ personal assets and personal property, like homes and savings accounts, are protected if the business entity faces claims on its assets as a result of bankruptcy or lawsuits.
-
Pass-through taxation. Business owners use LLCs for their tax benefits, namely the pass-through tax status—meaning profits avoid corporate taxes and pass directly through to members’ personal income, which is reported on their income tax returns.
-
Ease of setup. LLCs require relatively little startup paperwork compared to corporations. Setting up an LLC typically requires filing articles of organization with your state and creating an operating agreement, though specific legal requirements vary by locale.
-
Simple management structure. There is a good deal of freedom in the LLC management structure. For example, there’s no requirement to have boards of directors or regular shareholder meetings. LLCs can also be owned by individuals, a C corp or an S corp, or even another LLC.
-
Protected company name. No other business in your state of formation can adopt the same name as that of your LLC.
What are the steps to creating an LLC?
Here are the key steps to setting up an LLC:
1. Pick a name. Choose a unique business name that complies with your state’s LLC naming rules, and be sure it’s available by checking with your state’s secretary of state office (or its website).
2. Appoint a registered agent. Select a registered agent who can accept legal documents on your LLC’s behalf. This can be you, an employee, or an outside professional service.
3. File articles of organization. File required formation documents with your secretary of state’s office. Forms differ depending on the state, but generally they require basic company information. You will also have to pay a filing fee.
4. Draft an operating agreement. Create an operating agreement outlining the LLC’s ownership structure, members’ rights and responsibilities, and rules for day-to-day operations. Operating agreements aren’t required in all states, but having one on hand to resolve disputes may come in handy if you have multiple members.
5. Obtain an EIN. Apply for an employer identification number (EIN) from the US Internal Revenue Service (IRS). You’ll need this for tax purposes both at the federal and state levels, and for opening business bank accounts.
6. Obtain necessary licenses and permits. Apply for any required business licenses or permits specific to your industry, location, or products.
7. Set up bank accounts. Set up business bank accounts separate from your personal bank accounts to maintain the personal liability protection of your LLC. One surefire way to lose limited liability legal protections is to mingle personal and business funds.
LLC owners also are required to file annual or biannual reports with their state (sometimes called statements of information), pay annual state fees and franchise taxes, update the state about any significant changes to the business (such as address changes), and ensure all required licenses and permits are current.
Again, specific requirements can vary by state, and some industries may have additional requirements. It’s often helpful to consult with a local legal professional during this process.
Free: Business Plan Template
Business planning is often used to secure funding, but plenty of business owners find writing a plan valuable, even if they never work with an investor. That’s why we put together a free business plan template to help you get started.
What is a Ltd. company?
A limited company (Ltd.) is a private company structure most commonly used in the UK and other Commonwealth countries—e.g., India, Australia, New Zealand, Singapore, Canada, South Africa, Nigeria, and Jamaica. It’s worth noting that while many countries offer Ltd. or similar business structures, the specific rules, requirements, and even terminology can vary significantly between jurisdictions. In this article, we’ll look at the legal obligations in the UK. In some regions, the Ltd. company is known as a private limited company, or a proprietary limited company.
Unlike its LLC cousin, a Ltd. must adhere to more stringent corporate governance requirements, including the appointment of directors, maintaining detailed company records, and filing annual financial statements with Companies House—the government agency that maintains a national register of companies operating in the UK.
Key features of a Ltd. company include:
-
Limited liability. There is complete, legal separation between business assets and owners’ private assets. Shareholders are only personally liable to the extent of their stake in the business.
-
Ability to issue shares. Ltd. companies can raise capital through private share offerings. Shares (or the option to purchase them) can also be issued to employees as part of compensation packages. Shares in Ltd. companies are easily transferred or sold privately, making it simple for shareholders to come and go, or even sell the entire business.
-
Protected company name. Once registered, no other company in the UK can use the same name.
What are the steps to creating an Ltd.?
Here are the essential steps to register and set up a Ltd. company in the UK:
1. Name your Ltd. Choose and check your company name through Companies House to ensure it’s unique and follows naming rules. All names must end in “Limited” or “Ltd.”
2. Appoint directors and distribute shares. You’ll need to select company directors, guarantors (guaranteeing payment of company debts), and how many initial shareholders you’ll have. You won’t be restricted to issuing the number of shares identified in your initial reports to Companies House. Statutory registers, discussed in more detail below, can be updated as circumstances change.
3. Select your SIC code. A Standard Industrial Classification (SIC) code is a unique set of five numbers that represents a specific economic activity. When a new company is registered at Companies House, at least one SIC code must be supplied to broadly indicate what the business does. (Many countries, like the US, also use SIC codes, but those codified by Companies House are specific to the UK.)
4. Write your memorandum and articles of association. These are formal documents that define how your Ltd. company plans to operate. These will include director and shareholder details, specifics on shares, and information about individuals with significant control of the business.
5. Register with Companies House. Submit your documents to register your Ltd. company with Companies House. The minimum cost is £50. Most registrations are done online and completed within 24 hours.
6. Set up tax registration with HMRC. You’ll need to register your Ltd. company for tax purposes with His Majesty’s Revenue and Customs (HMRC) within three months of opening for business.
7. Compile statutory registers. Statutory registers (also known as statutory books) are a set of official company records that Ltd. companies must maintain. They include a record of past and present directors, a list of shareholders, a report of people with significant control of the company, a log of share transfers, and a register of any loans or mortgages secured against company assets. Many Ltd. companies use financial professionals or company formation agents to maintain and archive these registers.
8. Set up post-registration accounts. After registration with Companies House, you need to open a business bank account; register for value-added tax (VAT) if your gross annual revenue will exceed £90,000; set up a pay-as-you-earn payroll tax account if you plan to hire employees; and arrange for business insurance, like professional indemnity or employers’ liability insurance.
Ltd. companies must also file annual reports (which include an annual financial statement and a company tax return) with Companies House, submit an annual confirmation statement (updating contact information if needed), file corporate tax returns, and maintain proper business records going back at least six years.
LLC vs. Ltd.: What’s the difference?
Although both LLCs and Ltd. companies offer limited liability protection for their owners, their structures and requirements reflect their distinct origins on either side of the Atlantic Ocean.
Compliance
LLCs typically offer more flexibility in management and taxation, with minimal formal requirements for record-keeping and annual filings. In contrast, Ltd. companies operate under stricter corporate governance rules, requiring formal appointments of directors, detailed statutory registers, and comprehensive annual reporting.
Operational formality
An LLC can conduct business with fewer formalities and with a flexible management structure outlined in an operating agreement. These agreements can be modified with relative ease. A Ltd. company, however, must follow more rigorous procedures, including holding a general meeting for directors and certain shareholders upon request, maintaining detailed statutory books, and following specific protocols for decision-making and share transfers.
Tax benefits
LLCs don’t pay corporate taxes on profits by passing them through to members, who then report those earnings on their personal tax returns. In a limited company structure, profits are taxed twice: first, as corporate income, then again at the personal level when profits are distributed to shareholders as dividends.
Credibility abroad
Although LLCs are quite common and established in the US, Ltd. companies are more widely recognized and can command greater credibility in international markets.
Fundraising
Ltd. companies offer a more structured framework for raising capital because they can issue shares. Shares, or the option to buy them, can also be included in employee compensation packages. Transferring shares can also be an alternative to the formal sale of the company to a third party. In contrast, LLCs cannot issue shares. Although they can accept outside investments, these investors are not treated as LLC members unless the operating agreement is amended to make them one.
Longevity
An Ltd. can easily outlast its founders because ownership stakes are easily sold or transferred. LLCs don’t have shares, and in LLCs with many members, all of them may have to agree when another member wants to sell their stake. In the absence of agreement, the LLC may need to dissolve.
LLC vs. Ltd. FAQ
Can I use “Ltd.” for an LLC?
In many states you can’t use “Ltd.” alone to refer to an LLC. The abbreviation is available for LLCs in some states if accompanied by “Company” or “Liability Company.” For example, in Hawaii, your LLC name can include “Ltd. Co.,” and in Colorado, your LLC name can include “Ltd. Liability Company.” A few states, such as Arkansas and Oklahoma, allow “Ltd.” alone to refer to an LLC.
Is a Ltd. public or private?
A Ltd. company is considered a private legal entity in the UK. However, its framework is similar to a public corporation (one in which shares are traded on a stock exchange), which can make the transition from a Ltd. company to a public limited company easier.
What is an example of a Ltd. company?
Some well-known examples of Ltd. companies in the UK include vacuum cleaner maker Dyson Ltd. (which moved its headquarters to Singapore in 2019), accounting and consulting firm Deloitte Touche Tohmatsu Ltd., and Virgin Atlantic Airways Ltd. But it’s important to note that Ltd. companies aren’t just large corporations. Many small and midsize British and Commonwealth businesses form as Ltd. companies, such as small retail shops, tech startups, and professional services firms.
