Ltd vs. LLC: What’s the Difference?

LLCs vs. Ltds: Quick facts

Here’s a brief overview of LLC vs. Ltd, which highlights the key differences and similarities between each business structure:

• Location: LLCs can be formed in the United States, while Ltds are formed in the United Kingdom.
• Protections: Both LLCs and Ltds provide personal limited liability, as they legally separate personal assets from business assets.
• Management: LLCs and Ltds both enjoy relatively simple management structures.
• Profit distribution: LLCs are not shareholder companies, therefore profit distribution can be a little more complex than with Ltds, which are shareholder companies.
• Taxes: LLCs have tax flexibility, meaning that they can choose to be taxed as pass-through entities or as corporations. Ltds don't have these tax benefits; they pay corporate income tax in the UK.
• Paperwork and recordkeeping: With LLCs, formation paperwork, recordkeeping, and annual reporting is relatively minimal compared to Ltds, which typically require more formation documentation, recordkeeping, and annual filings.

The following sections provide more detailed insights into these aspects of both types of companies.

What is an LLC?

An LLC, or limited liability company, is a legal entity that provides its members with certain benefits, notably limited liability protection for personal assets. This means that the assets of the business and the personal assets of the owner and members are treated as separate. 

LLCs are common business entities in the United States. They are a popular choice for small business owners who want a formal, legal separation between their company and personal assets but who also desire more flexibility than a corporation provides.

There are several key aspects of an LLC that set it apart from other types of business structures.

Personal liability

Personal liability is a concern for many people forming a business. With an LLC, all members can enjoy personal liability protection from business debts or even legal issues with other members of the business. 

For example, if the LLC is in debt, creditors can typically only pursue the business’s financial or other assets, not those of its members, like personal property. This protection also extends to potential wrongdoings of other members or employees of the LLC, meaning that individual members are protected from legal action taken upon another member’s wrongdoing.

Limited liability is also a characteristic of corporations, while a sole proprietorship or general partnership business structure does not have this benefit.

Management structure

There are few formal requirements for managing an LLC. For example, when comparing LLCs vs. corporations in the United States, it’s clear that LLCs can have simpler management structures: 

• They do not require creating a board of directors or implementing senior officer positions.
• There are no shareholders, therefore LLCs are not required to hold shareholder meetings. 
• LLCs can either be single-member or multi-member. 
• LLCs can be member-managed or manager-managed (the latter option is typically used in the case of multiple passive investors who don’t participate in the daily business operations of the LLC).

Although LLC management isn’t typically complex, transferring ownership can be a pretty involved process if there isn’t an operating agreement form in place, as ownership transfers typically require unanimous approval of all LLC members or are subject to state law.

Profit distribution

LLCs can distribute profits however they’d like. Distributions are based on ownership stake or the percentage of interest that each member holds. For single-member LLCs, this is quite straightforward. However, it can become more complicated with multi-member LLCs. For these LLC types, it’s crucial to have profit distributions outlined in an operating agreement to avoid any future disagreements. 

Taxes

According to IRS tax classifications, single-member LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships, both of which are pass-through tax entities. But LLCs don’t have to default to these classifications; they can instead elect to be taxed as C corporations or S corporations. 

Formation paperwork and recordkeeping

LLCs, in contrast to some other business types, are easy to organize. While there are certain formation documents, like articles of organization, that an LLC must file with the relevant state agency, this type of business entity typically has less paperwork. 

Additionally, they aren’t required to keep as many detailed records on file as corporations and, depending on the state, they might not need to submit certain documentation, like annual reports. 

What is an Ltd?

An Ltd is a legal entity that is common in the United Kingdom, with Ltd meaning “limited.” Similar to LLCs in the United States, Ltds, or private limited companies, in the UK, provide a legal separation between owners/members and the business. 

Other characteristics of Ltds include a flexible management structure, straightforward profit distributions, corporate taxes, and strict requirements for recordkeeping and annual filings. Some of these aspects of an Ltd structure share a lot of overlap with characteristics of corporations in the United States.

Personal liability

Similar to an LLC, all owners and shareholders of an Ltd have liability protection. This means that members are only personally liable up to the value of their shares in the event of financial instability, legal action, or insolvency. So, if you’re a small business owner or member of an Ltd, your personal assets will typically not be at risk if any legal or financial action is taken against your company. 

All Ltds have protection from personal liability, whereas other business structures in the United Kingdom, like sole traders or partnerships, do not.

Management structure

The ownership and management structure of an Ltd is relatively flexible. The only requirement is that there is one member (called a shareholder) who owns at least one share, thus owning and controlling the company, and one director who runs daily operations. However, the member and director can be the same person.

In addition, succession of an Ltd to another owner is easy. A private limited company does not cease to exist upon the death of its owner or a transfer of ownership; rather, it exists in perpetuity. It can easily pass to an inheritor or be sold to another owner. 

Profit distribution

Profit distributions with an Ltd vs. LLC are a little more rigid—because an Ltd distributes profits based on the number of shares that each member holds. This creates a straightforward process for profit distribution. Information about shareholder names and their number of shares should be kept up-to-date in the Register of Members.

Taxes

Because Ltds refer to a corporate model in the United Kingdom, they are taxed as corporations, meaning that they pay corporate tax on the company’s profits. Small businesses can typically lock in a lower tax rate of 19% than companies with larger profits, which are taxed at a rate of 25%. Shareholder dividends are also taxed, and Ltd shareholders personally paid these taxes.

Formation paperwork and recordkeeping

Along with submitting articles of association and a memorandum to form an Ltd, certain information is required on the application, like director and shareholder details, specifics on shares, and information about individuals with significant control of the company. Then, once the Ltd is legally registered, it has to file annual documents with Companies House, the government agency that manages the incorporation and regulates compliance of companies in the UK.

Ltds must also keep detailed records of meeting minutes, accounting records, business changes, shareholder information, and more.

When you’re considering an LLC vs. Ltd, remember that while both can be beneficial for your business, LLCs are used in the United States and Ltds are used in the United Kingdom. For US business owners, set up your LLC with confidence using LegalZoom’s business formation services, where we help you kickstart your new endeavor so you can focus on taking your ideas to the next level.

FAQs

What does LLC stand for in business? 

LLC stands for “limited liability company,” which means that members enjoy personal liability protection. In contrast to a general partnership or sole proprietorship, an LLC creates a legal separation between the business and the individuals.

What are the advantages of an LLC? 

There are many advantages of an LLC business structure in the United States, including protection from being personally liable, simple management structures, and flexible tax classifications and profit distributions. LLCs typically have fewer ownership restrictions and less formation paperwork and recordkeeping than corporations.

What are the advantages of an Ltd?

The advantages of an Ltd business structure in the United Kingdom include straightforward profit distributions based on how many shares each member holds, legal separation between the business and its members' personal assets, relatively flexible management structures, and simple ownership transfers. 

Can an Ltd have only a single member?

Yes, an Ltd can have a single member. Although the application to form an Ltd in the United Kingdom requires the names of the member and director, these roles can be held by one person, who would serve as both the member (shareholder) and the director of the Ltd. 

Can I use Ltd instead of LLC?

When naming your LLC, you’ll need to comply with state requirements, which typically mandate that “limited liability company,” “limited company,” “LLC,” or other variations follow the actual business name (e.g., Beauty by Liz, LLC). Some states allow “Ltd” to follow the LLC business name; check with the relevant state agency to ensure that your LLC name is compliant.