Meaning of Company Limited By Shares: Everything You Need to Know
What is the meaning of company limited by shares? It turns out to be a very common question with many answers. 3 min read
2. What Is a Company Limited by Shares?
3. What Is Ltd. (Limited)?
4. How to Set Up a Private Limited Company
5. Advantages of a Private Limited Company
Updated October 8,2020:
What Is the Meaning of Company Limited by Shares?
What is the meaning of company limited by shares? It turns out to be a very common question with many answers. Essentially, a company can be limited in capital based on the number of shareholders who are owed money on their shares. This limits the company to only pay out original investments should it go under or suffer major financial setbacks.
What Is a Company Limited by Shares?
According to Section 2 (22) of the Companies Act 2013, a company that is limited by shares is refers to a company that has the liability of the members limited by such an amount that is unpaid on their respectively held shares. The company can enact this liability while the company is in existence or as it is ending.
Limited by shares refers to the liability of the shareholders to the creditors of the business for the money that was invested originally.
According to the Companies Act 2013, if the liability of the company members is limited by the amount not paid on shares they hold, this is referred to as a company limited by shares. The shareholder has to meet the debits of the company only to the extent that is unpaid on his shares and no separate property can be used to meet the debt.
A company that is limited by shares will divide the share capital into fixed amount shares that can then be issued to shareholders and subsequently become company owners. A company limited by shares can be financed using loans, equity, and grants.
There are two different limited companies:
- Limited Company by Guarantee: This company has no shareholders. It contains members who contribute small amounts to pay for any outstanding debt if there is the possibility of a liquidation.
- Public Limited Company: This company typically trades publicly. Shareholders only have to be liable for their own individual investment value.
An LTD is most commonly incorporated for private and commercial ventures. It is limited by shares and has the liability of the members limited by its own Constitution. This type of company does not include an objectives clause. This way, it can trade in any legal business that the shareholders deem fit.
A small or medium company will need to file shorter audited accounts with not as much information with the Companies Registration Office. An annual return also needs to be filed each year even if the company never traded.
What Is Ltd. (Limited)?
With a limited company, a shareholder’s personal assets will be protected should a company go under. The shareholder’s only liability will be limited to the money they invested initially. A limited company is its own business structure. Private limited companies have more than one member that buy into the company via a private sale.
A director is a company employee that maintains the daily administrative tasks without necessarily a shareholder. The company finances are completely separate from the owner’s own assets. They are taxed separately.
A company will own all the profits and pay the taxes, provide the dividends to shareholders, and keeps the rest to use for working capital.
The director can withdraw money for a salary, dividend payment, or lone only. All profits that the company makes can be kept after tax payments. All company finances have to be separated from any personal finances to prevent any confusion.
How to Set Up a Private Limited Company
There are several things you need to set up a private limited company:
- The name and address of your business
- The names of at least one director and shareholder
- The articles of association, which is the agreement to create the business and the rules pertaining to it
- The names of those with major control in the company, or those with over 25 percent of the voting rights
Advantages of a Private Limited Company
Since there can be an unlimited number of shareholders, the liability can be spread among many shareholders instead of one. A shareholder will only lose as much as he or she invested should the company fold.
If you need help with understanding the meaning of a company limited by shares, 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.