Limited Company Structure: Everything You Need to Know
A limited company structure is a separate legal entity with the authority to run a business and is governed by company law.3 min read
2. Advantages of a Limited Company Structure
3. Managing a Limited Liability Company
4. Forming an LLC
A limited company structure is a separate legal entity with the authority to run a business and is governed by company law. With a limited company, the liability is limited to the company with shareholders liable for their share of capital.
About a Limited Company Structure
Several factors are in place regarding a limited company structure. These are:
- There must be at least two directors. This is in effect for a private limited company. For a limited company, there must be a minimum of three directors. One director is required for a one-person company.
- A company secretary must be selected (this person can be a director or outside agent).
- It can be created from scratch or "off-the-shelf."
- The name of the company must be approved and registered with the Registrar of Companies before doing any business. This requires the filing of the Memorandum of Association and the Articles of Association, which includes a Certificate of Incorporation.
Many times, as a business expands beyond its anticipated size, the income surpasses a certain level, or the business needs investors for an expansion, the limited company structure is a viable consideration. There is no rule about which types of businesses should use the limited company structure. It has been used by small businesses with a handful of employees to large corporations with thousands of employees.
Advantages of a Limited Company Structure
Since the company has the benefit of limited liability, the personal wealth of the director cannot be seized to pay off any debt. With the ownership of the company spread among others, it in effect dilutes the financial risk. Directors can choose how they want to be paid. This can be in the form of a salary, dividends, or both.
Limited structured companies are also subject to annual reports. This can be seen as a positive step in the company's structure as it shows the framework of operation is organized.
While annual reports are a positive indication of a well-managed business, the amount of paperwork involved may be seen as a disadvantage. On a yearly basis, statutory accounts must also be filed with the Company Registration Office. Be prepared to incur the cost of hiring an accountant. Due to complex tax rules, you will need the services of a professional tax consultant.
Managing a Limited Liability Company
Before conducting business, a management structure must be in place to ensure the operations are organized versus disorganized, which can prevent the business from successfully launching. A limited liability company (LLC) is managed by its members, managers, or those appointed as officers.
All owners of an LLC are called members. When managed by the owners, the LLC is said to be member-managed. While LLCs may have multiple owners, it is also possible to form an LLC with one member (the sole proprietor) only. A single-member LLC may not have the benefit of the same level of liability protection as that of a multiple member LLC. In some courts, a single-member LLC is viewed more critically.
When multiple members are involved who want to have a more centralized control of the company, the manager-managed LLC structure is the alternative. With this structure, the managers are appointed to handle the management details, which allows the members to still exert a portion of control over the LLC but are not responsible for its day-to-day activities. This type of structure also allows members to invest in a company without being overly involved in the operations.
There are various stakeholders in a company's management team, which may include shareholders, officers, managers, and directors whose job is to guide the company towards its goal of fulfilling its objectives.
Forming an LLC
The formation requires for forming an LLC vary from state to state but a consistent requirement for most states is the filing of the Articles of Organization with the Secretary of State or other agency. The articles will describe the LLC's choice of management structure.
It is recommended that you create an operating agreement especially for LLCs with many members or appointed officers. The operating agreement is a detailed written plan that outlines all areas of the management structure in a clear and transparent manner or the members as well as the investors.
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