Do you often see the terms ‘Pty’ and ‘Ltd’ at the end of a business name? Do you sometimes wonder what they might actually mean?
A vast majority of people might know that respectively, the abbreviations connote ‘proprietary’ and ‘limited,’ but all too often this is the extent of our knowledge.
Most company names end with ‘Pty Ltd’ or ‘Ltd’ and for most customers of a business, these letters are meaningless, but they indicate the liability of the company and it becomes particularly important in situations of insolvency. If you’re an aspiring business owner, then these letters carry far more weight than in any other circumstance. When you register a company, you must include one of the three possible liability schemes (No Liability is the rare third option). The misuse of them is strictly regulated by ASIC and constitutes a breach of the Corporations Act 2001 (Cth).
Like many other facets of business, this notion is derived under the Legal Entity principle – the principle that stipulates that a company is its own legal entity and treated as separate to its directors. This principle generally protects directors from being personally liable for the losses or failures of their company.
A sole trader operating a business rather than a company will be liable for the losses and obligations of the business. This is because businesses are not recognized as separate legal entities. A company on the other hand is a separate legal entity.
The ‘proprietary’ in ‘proprietary limited’ prefers to the company being private – meaning that a limited number of shareholders own the shares of a specific company. Private companies may only have up to 50 shareholders and are only required to have one director. A private company cannot be listed on the Australian Stock Exchange and is precluded from offering its share to the general public, which makes raising capital much more difficult for them.
The ‘limited’ in ‘proprietary limited’ refers to limited liability – the fact that a shareholder’s legal responsibility for a company’s debts or liabilities is limited to the number of shares owned. Plainly, if a company becomes insolvent, the shareholders will only be liable to lose the money they used to purchase their shares. In some cases where a shareholder has partly paid for shares, they are required to pay the remaining money they owe for those shares.
An alternative to a company limited by shares is a company limited by guarantee. In these companies, members agree to a certain amount of legal responsibility upon becoming members. In other words, they agree to guarantee a certain amount of liability to the company.
Proprietary Limited Companies
A Pty Ltd company is relatively easy to set up and not difficult to maintain. A Pty Ltd company cannot raise capital by offering shares to the general public and their director(s) are commonly well protected from any liability to the company’s debts. For these reasons, Pty Ltd companies are the most common type in Australia and generally suited for small to medium sized companies.
Unlike their Pty Ltd counterparts, Ltd companies are public companies, meaning they can sell shares to the general public as a means of capital raising and they may be listed on the Australian Stock Exchange. A Ltd company may have an unlimited number of shareholders but must have a minimum of three directors. Public companies are met with far stricter regulations, including significant accounting and reporting obligations which are designed to protect the public. Like their Pty Ltd counterparts, the directors of a Ltd company are protected by the limited liability shame.
Why does it matter?
Knowing the legal jargon and meaning behind ‘Pty’ and ‘Ltd’ is not a shallow piece of knowledge to unleash at your next meet and greet or networking event – it is critical to a basic understanding of rights, obligations and avenues for legal action in circumstances of corporate insolvency. More importantly, knowing the basic meanings and affects of company structures better equips any person that either; wants to start their own company or engages in frequent business dealings with companies.
If you are an aspiring entrepreneur or a current business owner, you might be very aware of the commercial and legal landscape but there will never be a substitute for the highest quality specialised legal advice.