A limited liability company is a type of organisation owned by shareholders, whose liability is limited to the amount that they invested in the company. Specifically, their liability is limited to the worth of all the fully-paid shares that they own. This is different from a sole trader, who incurs unlimited liability. Hence, if the trader’s company is yet to creditors, the owner’s personal possessions may also be confiscated.
The following are the main features of a limited liability company:
- Unlimited ownership: There is no limit to the number of people who can own a limited liability company. On the other hand, sole traders can have only one owner while partnerships can have up to 20 (this depends on the country where it is located).
- Rewards in the form of dividends: Shareholders receive a regular dividend payment as a reward for investing in the company.
- Separation between ownership and control: The people who own the company are not necessarily the people who are running. This is because directors are appointed by shareholders of a limited company to take care of its day-to-day operations. A few of the shareholders can also be directors.
- Legal requirements: A limited company is legally required to audit and publish its financial statements.
- Shares: The main source of funding for limited companies is the issue of shares. Once it issues shares, existing or new shareholders have the option of buying them and therefore owning a part of the company. This way, the company will be able to raise money and the shareholders can receive a dividend.
There are 2 main types of limited companies: public and private limited companies. Public limited companies are allowed to issue shares to members of the public by enlisting in a stock exchange. On the other hand, private limited companies are not: they are only allowed to issue shares to their small group of owners.