What You Need to Know Before Forming a Limited Company - Ultimate Guide
What You Need to Know Before Forming a Limited Company – Ultimate Guide

If you are thinking about setting up a successful business, one of the first decisions you will have to make concerns the financial form under which you will operate. Limited Companies are the most common option since they are easier to set up and manage, but if it is an ambitious and far-reaching project, a Public Limited Company could be the most effective formula. In fact, in this article, We will explain what is a limited company, how it is composed and its main characteristics.

What is a Limited Company?

What You Need to Know Before Forming a Limited Company - Ultimate Guide
What is a Limited Company?

The  Limited Company is a commercial company that is formed with the capital contributed by each partner, which is divided into shares. Each shareholder does not personally respond to social debts, which is why it is one of the forms of business organization most used by large companies, in addition to being able to quote on the stock market, which drives their growth. Currently, the Capital Companies Law and the Regulations of the Mercantile Registry regulate the operation of companies of public limited companies.

The direct preceding of the Limited Companies is the Commercial Companies. They were European companies that settled in the different colonial regions of America, Africa, and Asia in the eighteenth century. They allowed financing the high cost of each trip transporting raw materials to the city.

These were semi-public entities in which the rulers were associated with the small capitalists, under a figure of profit sharing. Later, in the 19th century, this type of leadership passed entirely into private hands in almost all European countries. The model to follow was the English Company Act (1862) and the French Commercial Code (1807), found the basic postulates of a Limited Company.

What are the characteristics of the limited company?

What are the characteristics of the limited company?

1. Social denomination

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The Limited Company must have a name that has not been registered, followed by the abbreviation L.C., these abbreviations refer to an individual proprietorship, composed of a single partner, although in the Corporations there is no maximum limit of partners.

2. Constitution

The routine procedures to constitute a Limited Company are usually quite long and may take between 6 or 8 weeks. The constitution is made by public deed, complying with the provisions of the Commercial Code, which must be registered in the Provincial Commercial Registry.

3. The Responsibility of the partners.

Each partner, who can be a worker or capitalist, assumes the responsibility proportional to the capital that he has contributed, does not respond with his patrimony. However, there is an exception: if the judges determine that the company is used for fraudulent purposes, it is possible to carry out what is known as the “lifting of the corporate veil”, forcing the partners to comply with the obligations and debts of the company.

4. Social capital.

Establishing a Limited Company requires a minimum capital although at the time of the constitution it is only necessary to disburse 25%, the rest must be contributed according to the company’s laws. This capital can also be contributed in goods, but it is necessary that they are reflected in a report made by an expert appointed by the Commercial Registrar, which must be added to the articles of incorporation.

5. Division of social capital.

In the Public Limited Companies, the capital is divided into shares. As a general rule, each share attributes the right to issue a vote to the shareholder, although the bylaws may determine a maximum number of votes for each shareholder. Unlike a Limited Company, there is a free transfer of shares, unless the constitution statutes say otherwise so that each partner can sell or freely assign their shares. That is why it is a very interesting legal form to attract new investors.

6. Administration and management.

All shareholders meet at the General Shareholders. Meeting to elect the company’s directors and make the most important business decisions. However, to manage day-to-day affairs, a single administrator, joint administrators, a board of directors or a socio-economic administrator are usually elected. The usual thing is that the administrator can not occupy that position for more than six years.

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7. Financial responsibilities.

The Limited Companies must be taxed by the Corporation Tax and the value-added tax (VAT). The administrators and partners are taxed by the independent regime while the rest of the workers are under the general regime.

In summary, The Limited Companies are an unusual formula to undertake since they involve more complex constitution and management procedures, which increases costs, but they are an excellent alternative for large companies with many shareholders or that need to attract investors.

Types of limited company

The Public Limited Companies can be of two types:

  • Open-ended Limited Company: Are those that aspire to numerous shareholders, who enjoy greater commercial freedoms with respect to their securities, which go to the stock market.
  • Closed Capital Limited Company: Limited to a determined number of shareholders, it does not register its shares in the Public Registry of the Securities Market, nor it allows the free transfer of shares.

Elements that compose it

A Limited Company usually consists of:

  • A General Shareholders’ Meeting: Also known as the General Assembly of Members, in which the managers of the company are chosen, based on the participation of their shareholders, in person or through authorized legal representatives. It is the institution with the highest authority of the company.
  • An administrator of the company: Someone who will practice the executive and representative functions of the company, and who will be elected by the General Shareholders’ Meeting. It can be an individual or sole administrator, several joint and several administrators, a Board of Directors or a Socio-economic Administrator.
  • A monitoring council: A figure that does not exist in all countries, but that is in charge of supervising the work of the administrators and keeping the affairs of the company under internal control.

Differences with a Limited Company

These two types of capitalist society are distinguished in:

  • The LC (Limited Company) require little initial capital and are usually appropriate for companies with few members. The PLC (Public Limited Company), on the other hand, is better suited to large companies, in which the capital of all the partners can be agglomerated.
  • The transfer of shares in an LC must be given under notice to the board of partners, who will have full preferential purchase exclusivity, with the seller having to also inform who the new holder will be and provide all the information requested. In a PLC, on the other hand, commercial transactions are free and only respond to the commercial code of the law.
  • In an LC the responsibility of the partners is solidary with each other, while in the PLC it is limited to the invested capital.
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Requirements to create a Limited Company

In order to found a Public Limited Company, some requirements established in the commercial laws of each country must generally be met.

The usual thing is that it is required:

  • A minimum of partners or shareholders, all subscribing at least one share each.
  • An established minimum of share capital or subscription of shares.
  • A constitutive document of the corporation that responds to the regulations of the law.

Legal personality

A corporation constitutes a legal entity, therefore it will respond as such before the courts or competent courts before any eventuality.

International Denominations

Depending on the country concerned, the Public Limited Companies can be called in that way. In other countries, reference is made to their internal way of distributing securities. All the terms allude to the same.

Taxation

Companies pay taxes, of course, and usually do so through laws or special tax codes. According to the tax laws of each country, the Companies will pay more or fewer taxes than other entities.

Advantage and Disadvantages of forming a Limited Company

1. Advantages

Some advantages of forming a Limited Company are:

  • Freedom: The partners can freely market their shares and the Company can quote them on the stock exchange.
  • Protection: Since partners have limited liability, their personal assets are protected.
  • Flexibility: It can be constituted with a variable number of partners, being able in some countries to even be of only one (Unipersonal Limited Company).

2. Disadvantages

On the contrary, the disadvantages of this type of associations are:

  • Minimum capital: To constitute a limited company, a minimum of available and proven capital is usually necessary, as specified by law.
  • Strict operation: It is much stricter in its actions and more rigid than other forms of commercial society since it is much more supervised by the State.
  • High tax rate: It is also common for corporations to be subject to high taxes, but this is not a rule.

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