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Limited Companies

  • Date Submitted: 09/20/2013 06:37 AM
  • Flesch-Kincaid Score: 41.5 
  • Words: 640
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What is limited liability? Limited liability is a type of investment in which a partner or investor cannot lose more than the amount invested. Thus, the investor or partner is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled.

The ownership of companies is divided into small units called shares. People can buy these and become “shareholders”- part owners of the business.   All shareholders benefit from the advantages of limited liability. Nobody can make any further claim against shareholders. Limited liability assures shareholders that the only potential loss that they risk is the amount of money they have put into the company, not their total wealth. Each year, the company may decide to distribute some of its profit to its shareholders. The money is distributed proportionally according to how many shares you own-which is called a dividend.

A limited company has a legal existence separate from management and its members (the shareholders) which means that the company itself can be taken to court, not the owners, as would be the case with a sole trader or a partnership.

Limited liability is by far the most important advantage of incorporation. Limited liability protects the personal wealth of the shareholders. In a private limited company, it is easier to raise finance, both through the sale of shares and also easier to raise debt. It is a stable form structure business continues to exist even when shareholders change or die. Finally, it provides more privacy of information than a public limited company.

However, high taxes, smaller dividends are some disadvantages of a private limited company. Many private limited companies are very profitable, but these profits become diluted because they have to be distributed evenly among all shareholders. A private limited company is very expensive to establish, as legal fees or other incidentals involved in the business must be paid.

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