LLC vs. Ltd company: How do They Compare to Each Other?

You may have come across the initials LLC and LTD in company names. Do you know the meaning?

These are two different company types. A limited liability company (LLC) has members or shareholders with limited liability. This company type offers its owners limited liability and pass-through taxation. LTD stands for private limited company. In this company setting, shares are not issued to the general public.

These two business entities may seem confusing due to the emphasis on limitations. Regardless, they are different from one another and offer various advantages and pitfalls.

These two companies may seem similar due to the limited liability they emphasize. Though the name indicates that they are related in their function, they are pretty different, and each offers specific pros and cons.

This blog covers everything you need to know about LLCs and LTDs, including owners' liability, the formation process, tax considerations, benefits, and drawbacks.

What's an LLC?

A limited liability company (LLC) is designed to protect owners from bearing direct responsibility for the LLC's actions and obligations within the limits provided by shield laws. Like partnerships and corporations, this business structure also has features of the two, but with some characteristics of its own.

It operates as a business entity, but is an unincorporated association and not a corporation. Like corporations, it offers limited liability; conversely, it has to pass-through income taxation like partnerships. For example, they are characterized by limited personal liability, which does not damage the owner's private property, and by choice of taxation, which can be helpful for single-owner companies and small businesses.

An LLC may be taxed as a sole proprietor, partnership, S corp, or C corp. Regarding taxation, there are two ways: the LLC could be taxed under a separate schedule or the profits could be reported to the members on their income tax returns. Therefore, while forming an LTD, you establish one or multiple members from insiders and outsiders of the LLC.

The cost of registering an LLC depends on your state of registration and whether you form it through an agent like Foundeck or directly with the Secretary of State. However, the average cost is about $129.

What's an LTD?

An LTD, an abbreviation for Limited Company, is one of the most used corporate structures in most Commonwealth countries. The law limits the legal responsibility of shareholders for a company's debts to the amount they invested. This means their own property is secure, although the invested cash is exposed.

Business and corporate profits are taxed as such, for the entity, not for the persons who own the company, shareholders, etc.

LTD shares are usually sold to a few people, like co-founders of the business organization. This business structure has the concept of authorized share capital, which is the total number of shares the company is legally allowed to issue at times their nominal value. It also has the issued share capital, all the issued shares multiplied by their nominal value.

These shares may be issued at any time depending on the corporation's directors before shareholders' approval. Ownership of shares in an LTD can be done according to the agreement between the seller and the buyer.

Comparing LLC and LTD

LLCs and LTDs provide their owners with corporate business personalities and limited liability protection, making them the favorite choices for most business start-ups. Despite limited liability, they differ in their form and function, as well as in taxes and regulations.

In the UK, LTDs are registered through Companies House and characterized by directorship and share capital. However, US LLCs are filed at the state level, and the owners are called members who hold membership interests.

Let's explore more of LLC vs. LTD characteristics:

LLC vs. LTD: Ownership

LLCs do not have share capital and, therefore, do not issue shares. This company-type ownership is in the form of membership interest, which can be a percentage or units; hence, the owners become 'members.' However, transferring ownership in an LLC is difficult since it involves a unanimous vote of the members.

This information is outlined in the LLC's operating agreement and may also be filed with the Secretary of State depending on the state of organization of the LLC.

LTD is an entity that belongs to its shareholders or members, and each stake depends on the shares of stock a member owns. For instance, you own 100% of the business shares if there is one registered shareholder. If there are two members, each will own 50% of the business shares. The share distribution will change when the company has three shareholders, with each owning shares based on the capital they distribute.

Information about the shareholders is stored on the member's register, which is submitted to Companies House at the time of company formation and may be updated by submitting the confirmation statement.

LLC vs LTD: Limited Liabilities

LLCs and LTDs share several similarities, the main being limited liability. This means the business owners receive financial protection and aren't liable for business debts if they fall into financial trouble.

LLC protects its owners from debt and company financial issues. As an LLC owner, you stay protected from personal losses.

The LTD owners are only liable for the unpaid amount of the issue price of their shares. This can be a nominal value of as little as £1. But if you have fully paid for your shares, you have no further liability if the company gets into debt.

LLC vs. LTD: Management

Limited Liability Companies are managed by managers appointed by the members of the LLC. Managers can be LLC operatives or outsiders hired based on their professional proficiency. These managers are responsible for managing the day-to-day operations and making critical business decisions.

Due to the flexibility of the LLCs by law, the members can determine how the business management will be conducted by drafting and agreeing on the operating agreement.

LTDs are managed through a board of directors. Some directors are appointed by the company's shareholders (owners), while others are appointed from within the company. The board of directors is responsible for managing a company's operations and making strategic business decisions.

They also manage the company's business by providing legal compliance and performing shareholders' duties. Unlike LLCs, which can have managers who are not members, LTDs utilize directors to manage the companions' affairs in the best interest of shareholders; only directors are employed to maintain a structured and formal management solution.

LLC vs. LTD: Tax Payment

Taxation in LLCs is at the individual member level, where each member pays tax on their share of the business profit. LLCs are called pass-through entities since the tax liability is passed on to the member. However, as an LLC owner, you must still prepare and file some tax forms with the Internal Revenue Service (IRS) unless it is a single-member LLC.

The tax you pay as an LLC member can be complex because it depends on the number of individuals in the business and the state where you registered the company.

In contrast, LTD businesses pay their tax on their profits via corporation tax, which is currently 25%. However, there are reliefs and special rates for smaller companies. Since the company and its people represent different legal persons, the owners are not legally liable for this tax—it is the company.

Dividends are distributed among shareholders as a financial reward for company ownership. The Dividend Tax is paid for by the company's shareholders, not the company itself.

LLC vs. LTD: Public Register

The information disclosed when registering for the LLCs and is available to the public depends on the state. In some states, details similar to those that must be filed for an LTD are published. However, states like Delaware, New Mexico, Nevada, and Wyoming allow people to establish LLCs without disclosing their identity.

Although LLCs do not necessarily have to declare their financial data, they provide it to government bodies, potential creditors, and investors.

Certain information is available to the Companies House register when registering an LTD. These documents contain simple details like:

• The company's name
• Registered address
•  It's business description
• Directors and shareholders
• Persons with significant control,

The additional information you provide about the officials includes their date of birth and service address. This financial information must be published as a public limited company when filing the annual accounts.

Although residential addresses can feature on the register if the company utilizes them as the Registered Office Address or Service Address, you can prevent this by getting a dedicated Service Address and Registered Office Address.

LLC vs. LTD: The Company Registration Process

Setting up an LLC

The process of registering an LLC entails submitting this information online or offline on the state's version of the Articles of Organization:

1. Unique business name: Ensure the name you select isn't similar to any other in the state you are registering
2. Information of the registered agent: This individual will handle your company documentation and must be located in the formation state.
3. Principal place of company address: This is where your business will be running its operations
4. Reasons for forming the company: Provide a written of your business purpose
5. Information on how to manage the business: You need to provide information on how your LLC will be managed, whether it is manager-managed or member-managed.
6. LLC members signatures

Members must also file an operating agreement in some states, including California, New York, and Delaware. This document resembles the articles of association that an LTD has, as it determines the LLC's organizational structures, management, and distribution of earnings among members. Thus, an operating agreement is beneficial, even if it is not mandatory.

Once you file the required information, your LLC is formed within a few weeks, depending on the registration state.

Registering an LTD

When registering an LTD, you need to provide the following information on the IN01 form an application to register the company:

1. Unique business name: the name you select shouldn't be similar to any other on the Companies House Register
2. Company activity description: you can do this by selecting 1 to 4 SIC codes (Standard Industrial Classification)
3. Registered office address: This is the company's official address where official documentation will be received
4. Director information: this includes nationality, date of birth, service address, occupation and residential address
5. Shareholder information: this also includes nationality, date of birth, service address, occupation, and residential address
6. Share details: it includes total shares held by each shareholder, nominal value, currency, paid-up months, and share particulars
7. People with significant control information: this includes nationality, date of birth, service address, occupation, and residential address. You also need to incorporate the nature of their control. For example, they hold more than 20% of company shares.
8. Articles of association: This document is attached to the formation and application, which acts as the primary governing document of a company describing its operations and procedures.

After submitting the above information, your LTD can be formed within 24 hours. You will receive a certificate of incorporation after formation.

LLC vs. LTD: Post-Company Formation

After registering an LLC or LTD, the company has to meet specific requirements to remain compliant.

LLC, you need the following depending on your state:

1.  Pay an annual filing fee
2. File an annual report
3. Pay franchise tax
4. Apply for the Employer Identification Number (EIN) if you've employees

As an LTD, you need to:

1. Register for PAYE if you've employees
2. Register for corporation tax 3 months after starting business activities
3. File confirmation statement annually to Companies House updating changes in your company
4. Register for VAT if your annual turnover exceeds £90,000
5. File annual or dormant company accounts

Pros and Cons of LLC

 Advantages:

1. Tax Benefits: LLCs are pass-through entities, and taxes are paid individually per the share of profits and losses. This prevents the imposition of double taxation.
2. Liability Protection: LLC owners do not worry about debts and other company responsibilities. Shareholders' personal assets are secured in the case of business failure or inability to repay the debts; the creditors can only seize corporate assets.
3. Fewer Corporate Formalities and Paperwork: Compared to other business types, such as LTDs, they are relatively more straightforward to form, given the lenient requirements and paperwork. They take less paperwork and fewer corporate meetings, making managing an LLC easier.
4. Flexibility: Entrepreneurs prefer using LTDs because of their flexibility. Members (owners) can determine the company's structure and do not require the shareholders' interference, thus enabling the members to manage the company.
5. Easy to Allocate Profits and Losses: Since it is member-owned, distribution of profits will be easier as the members solely make it of the company. Members can impose higher levels of risk to acquire more revenues for the cooperative with the consent of other members.

 Disadvantages:

1. High Costs: Forming an LLC may be costly due to expenses and various fees. This can be a problem for those who want to start their own businesses with little capital.
2. Hard to Transfer Ownership: Ownership can only be transferred upon unanimous consent of the other owners; hence, it becomes complicated if ownership is needed.

Pros and Cons of LTD

Advantages:

1. Liability Protection: LTDs, like LLCs, offer shielding protection of their owners' other assets from the business ventures they engage in. Shareholders are not liable for the business's liabilities, meaning they can invest in the company without risking their own funds.
2. Enhanced Brand Value: LTDs are known to have higher brand value than other types of companies. The investors' involvement makes the business credible to the public, which may help attract customers and accelerate its growth.
3. Flexible Capital Structure: Due to the Ltds, shareholders can determine the equity they are willing to have in exchange for their investment, meaning that investors control their money and the degree of investments they are willing to make.
4. Brand Protection: Your business name is protected more when you operate under LTDs; others cannot use the name again. This exclusive right enables the company to seek the law's intervention if an entity attempts to emulate its brand.
5. Tax Benefits: Depending on your jurisdiction, a Ltd can provide various tax deductions. An accountant can advise on how to obtain the most out of these.

 Disadvantages:

1. High Formation Costs: Forming an LTD requires massive fees and legal costs. You also need recurrent costs to legally sustain the business's affairs.
2. Extensive Paperwork and Administrative Duties: : LTDs must maintain records of shareholders and directors, general and board of directors' meetings, business accounts, and other legal documents. This is mainly an administrative burden, and it may prove difficult, especially for someone with little experience, which ends up hiring help.
3. Rigid Business Structure: The involvement of shareholders can somehow complicate the company's running. If you are heading a company, decision-making isn't as simple as just deciding; often, shareholders have to cast their votes, which could take a lot of time and cause debates.

Form Your LLC with Foundeck Today

Foundeck offers a range of fast and efficient online company formation services, allowing you to register a business structure of your choice quickly from anywhere and keep it compliant. To get started, kindly contact us here.

Final Thought

Are you wondering which business structure is ideal for you? These two business structures have strong and weak points.

LLC offers financial protection and flexibility in ownership and management. However, these obligations can be tricky to navigate since regulations differ by state. Furthermore, transferring ownership of your LLC can be challenging due to a lack of share capital.

An LTD is easy and cheap to set up and provides financial protection, business credibility, tax, and efficiency. However, operating an LTD in compliance involves administrative tasks. The post-formation responsibilities may divert your attention from crucial business activities.

The business type you choose depends on your company's circumstances. If you need help on which is best between LLC and LTD, kindly contact one of our experts here.