In a limited company, the limited company liability of directors or shareholders of the business is limited only to what they actually have invested or pledged as collateral to the business. Limited companies can also be limited by guarantee or by voting. The latter can be even further subdivided into public limited companies and private limited companies.
A limited company normally has limited directors and significant control. Limited company laws are based on the law of the land, which grants limited company voting and holding power to its directors (also known as members). To exercise control over the business, directors must meet certain requirements that are specified in the Limited Company Agreement. However, most directors are elected for a specific term, generally four years or more, by the Board of Directors meeting at meetings called Board Meetings. A majority of Board meetings must be held outside of the state where the Company’s registered office is.
Each limited company will issue one or more types of stock. Usually, preferred and common stock are the two most common types of stock. Shares may also be issued, but these securities carry a much higher trading cost because of their limited market size and volatility. Common stock holders do not enjoy the same benefits as management or key employees and are not entitled to dividends or capital appreciation.
A limited company also cannot have a directors’ or officers’ liability unless it is an S corporation. An S corporation has all of the advantages of a partnership without all of its disadvantages. Also, limited liability companies can choose between various types of taxation, including direct taxation based on dividends or earnings. This provides them with tax efficiency and asset protection.
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Private limited company debts are much different than company debts. The debts of a private limited company are generally unsecured and will not be reflected on the balance sheet as debt. Unpaid shares and unpaid loans are reflected on the balance sheet as an asset. Because the assets of a private limited company are protected from bankruptcy, they can be used to finance growth and make investments to increase shareholder wealth.