Difference Between LLC and Private Limited Company: Everything You Need to Know
A private limited company is a common business structure, usually recognized by having the designator “Limited” or “Ltd” at the end of a business name.4 min read
2. Advantages of a Private Limited Company
3. Disadvantages of a Private Limited Company
4. Advantages of an LLC
5. Disadvantages of an LLC
Updated October 27, 2020:
Difference Between LLC and Private Limited Company
If you want to learn the difference between an LLC and private limited company, you should be aware of the specific advantages and disadvantages to operating each type of business structure. A private limited company is a common business structure, usually recognized by having the designator “Limited” or “Ltd” at the end of a business name.
An LLC is a hybrid business structure – operating similar to a corporation and a partnership. It operates similar to a corporation due to the limited liability benefits; it operates similarly to a partnership due to the greater flexibility and tax benefits.
The LLC operates as a separate legal entity from its owners (also referred to as members). For tax purposes, the LLC’s profits and losses pass through to the member, which are then reported on the member’s personal tax return (Schedule C – Form 1040). This is similar to that of a sole proprietorship.
Similar to an LLC (Limited Liability Company), the private limited company also provides personal liability protection against the company’s debts and obligations. Therefore, if the company faces a legal suit, the owner’s personal assets are protected.
Unlike the tax treatment for LLCs, a private limited company is taxed as a separate legal entity than that of the owners. This means that the company pays its own taxes on the profits. Another difference is the fact that the private limited company is formed with authorized share capital as well as the issued share capital. Specifically, the authorized share capital is the number of existing shares (that weren’t issued) multiplied by the nominal value of each share. Keep in mind that any existing shares that weren’t issued can be issued at any point, so long as the shareholders authorize the issuance. A private limited company’s shares cannot be offered to the public, and can only be offered privately.
Advantages of a Private Limited Company
There are several advantages to operating a private limited company, including the following:
• Private limited companies are separate legal entities from their owners, which provides personal liability protection for any potential legal suits brought against the company
• You’ll have enhanced credibility with a private limited company, as these businesses are registered and regulated, providing a more positive reputation to potential clients and customers
• It could be easier to obtain financing from banks with a private limited company
• Private limited companies can raise capital by privately issuing shares
• There are additional tax benefits, as dividends can be taxed at a lower rate than income earned from the business
Disadvantages of a Private Limited Company
There are a few disadvantages to operating a private limited company, and these include:
• Less privacy due to the publicly available company details on the company’s house database website
• There are increased costs to hire an accountant for a limited company as opposed to an LLC
• Private limited companies are required to file annual accounts and returns to the companies house website; if they fail to submit such information, they will either incur a penalty or be struck off.
Advantages of an LLC
There are many advantages to operating an LLC, including the flexibility, tax benefits, and simplicity in forming this type of business structure.
As previously noted, an LLC offers limited liability in terms of the business’s debts and obligations. This means that a member’s personal assets, i.e. home, car, personal bank account, cannot be affected.
All states in the U.S. recognize LLCs, and even non-U.S. citizens can be LLC owners within the U.S. Another benefit is the fact that, unlike corporations, LLCs need not hold annual meetings or keep minutes of such meetings.
Another benefit is the significant flexibility in terms of operating an LLC. Therefore, so long as all members agree, each member can be designated a certain role within the LLC. Similarly, the members can all have disproportionate percentages of ownership in the LLC, as long as it is agreed upon and stated in the operating agreement.
Disadvantages of an LLC
While there are many benefits, there are also some disadvantages for operating an LLC, including the following:
• An LLC cannot issue stock
• Some states don’t allow single-member LLCs, but rather require that two or more members form an LLC
• In many states, if a member leaves the LLC, the business will automatically dissolve
• LLC owners can’t split the company profits to attempt to reduce taxes
If you need help learning more about the difference between an LLC and a private limited company, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.