A private company limited by shares is a type of business structure that denotes how liability and shareholding is managed. The term is more commonly used in the United Kingdom, Ireland, and Australia, where a private company limited by shares is usually recognizable by the abbreviation "Ltd," as in “Smith Brothers, Ltd.” In the United States, the company may use a similar abbreviation or may be considered a corporation, which has limited liability by virtue of its basic structure.
The term “limited liability” is used to describe the financial responsibility that investors have to the company. In a private company limited by shares, each shareholder is only responsible up to the unpaid amount of any shares he or she owns. This means that, should the company fold with enormous debts, creditors could not come after shareholders for repayments. Limited liability companies, whether public or private, are considered far safer investments than the much rarer unlimited form of company, since the investor can essentially only lose what has already been spent.
A private company limited by shares is distinguished from a similar but separate type of limited company, known as a private company limited by guarantee. This type of structure is usually reserved for non-profit groups and clubs that have guarantors rather than shareholders. Limiting a company by guarantee means that guarantors or members agree to pay a small amount if the company fails, but do not have to invest in shares. Since a non-profit or charitable organization does not generally distribute dividends to investors, acting as a guarantor is generally considered to be in the interest of the organization, rather than for personal financial gain.
The other distinguishing feature of a private company limited by shares is that it is a private, rather than public company. Being a private company entails certain restrictions as to selling or transfer of shares, as well as limiting the total amount of shares and shareholders. Should a shareholder of a private company wish to sell shares, he or she cannot do so on the open market. Unlike a publicly traded company, the shares of a private company cannot be sold on stock exchanges, or to members of the public who are not also shareholders. Many regions also have limitations on the amount of shareholders allowed in a private company; the decision to add more shareholders usually involves reincorporation as a publicly traded company.