What is a Limited Liability Company?
Limited Liability Company is the U.S. term wherein the members of the corporate structure are not personally liable for the debts and obligations. It may or may not be an incorporated association. One needs to file the “Articles of Organizations” within his state. It combines both the features of sole proprietorship, partnership and corporation. It is a mix of various forms of businesses. It has a feature of limited liability of a corporation and the flexible tax structure of partnership or sole proprietorship. The owners of the beneficial rights are called “members” instead, in normal terms, “shareholders.”
Creation of Limited Liability Company
- Choose a legal business name available in your state.
- File Articles of Organizations (normally called) and pay the filing fees as per the state norms.
- Need to create an Operating Agreement though not mandatory but advisable, which includes the rights and liabilities of the members of the LLC.
- Publish a notice in a local newspaper for a few weeks of the intention to form an LLC. This requirement is for some states only.
- After all the steps, an official LLC is formed. But one has to obtain all the necessary licenses and permits required to operate the business.
Features of Limited Liability Company
The laws of the LLC differ from state to state. But hereby, we discuss some common features that are found common in almost all the jurisdictions.
LLC is a separate legal entity in almost many states, meaning thereby that it can own property, retain attorneys, sell or buy a property, etc., on its own. It is distinct from its owners. Owners are not responsible for the obligations of the corporation.
One of the features of LLC is the limited liability of the employees, members, managers, etc. It simply means that the members are not responsible for the misdeeds and legal faults of the other members. Hence, they have protection for the same. But they are responsible for their wrong legal misconducts.
This feature of LLC gives the members of the corporation an option to tax themselves either as a sole proprietorship, partnership, or as C or S corporation unless otherwise stated. Sole proprietorship- as a single member, partnership- as a group of members, and C or S corporations- as a single or multi-members. Choosing the right type of corporate structure helps the LLC members decide which of them is the most suitable and profitable for them.
There is simplicity in the case of documentation and carrying out operations of the company. There is less record keeping comparatively.
While the corporations continue to operate in case of any death or insolvency or if anybody leaves. But this condition is not compulsory in the case of LLC. It is fully the member’s decision whether or not to continue in the same company or create a new one.
Advantages of Limited Liability Company
- Pass-through Income Taxation, i.e., there is no double taxation. The LLC owners file their own personal tax returns; they need not file that of LLC, avoiding double taxation except if taxed as a C Corp.
- There are fewer regulations in LLC compared to other organizations.
- The members of the LLC get somewhat or full protection from the acts and obligations of the LLC depending on the state laws.
- There are less paperwork and less record-keeping comparatively.
- Since there is flexibility for selecting how the members are to be taxed, they can plan for income and taxation.
- Even a single natural person can start an LLC if the state does not restrict it.
For more coverage on Advantages, please read our article on Advantages of Limited Liability Company.
Disadvantages of Limited Liability Company
Though there are many advantages to LLC, there are disadvantages too. Let’s glance at them.
- As discussed earlier, the LLC may or may not require legal formalities and an organized manner to run itself. Not many would show a great interest in investing in the same. LLC might face many financial issues as investors look at the goodwill and but obviously, their maximum and secured returns now and in the future.
- There may be a possibility that the LLC shuts down and either merges with another corporate structure or decides to form a new one. So, this does not only lead to huge expenditure but also a breach of confidentiality and security risks.
- There is not much clarity in the management structure which can be a pro for some. But unclarity is always some or the other way, not so preferable by many.
- Since there are different titles (manager, member, managing member, partner, chief executive, etc.) used in LLC for different persons, there may arrive confusion. The chaos may be as to which persons carry which authority and who can enter into commitment or act on behalf of LLC.
- If the founder of the LLC wants to be a publically listed one, LLC is not suitable for him.
- In some states, the members of the LLC may have to pay self-employment tax.
For more coverage on Disadvantages, please read our article on the Disadvantages of a Limited Liability Company.