Definition of Limited Liability Company
Limited Liability Company (LLC) is a popular form of business that is a hybrid of a partnership form of business and a company form of business. In other words, it provides the benefits of both these business forms.
Introduction to Limited Liability Company
Getting started with a business involves many decisions an entrepreneur undertakes, which have a far-reaching impact on the business. Among the many decisions that an entrepreneur has to take, one very important decision is related to the choice of the form of business.
One can choose from various forms of businesses, namely Sole Proprietorship, Partnership, Company, and many more. Each business form has merits, demerits, legal formalities, tax implications, etc. Among these business forms, one relatively new business form is gaining popularity in the new age of entrepreneurship: Limited Liability Company (LLC).
Under this business, the owners are not personally liable for the company’s debts and liabilities (a feature peculiar to the company’s form of business). They are provided the same legal protection just like the members of a company. It implies that in the unlikely event of a business suffering losses and getting sued, creditors cannot claim the personal assets of the owners of the LLC. Further, this business form can have an unlimited number of owners/members. The rules governing LLC differ from country to country, and they are not uniform. Any business form opting for this form of business use LLC at the end of the entity’s name. For example, Clear Advisor LLC’s name signifies that the business is an LLC.
An LLC can be started even with a single member, governed by its Memorandum of Association (MoA) and Article of Association (AoA). It is an ideal business form for small and medium-scale businesses and early-stage startups as it is easy to form requires minimal legal formalities to comply with, and makes it easy for the entrepreneur to focus more on the operation and business aspect.
Characteristics of a Limited Liability Company (LLC)
- Limited liability company (LLC) format requires fewer compliance formalities pertaining to conducting Board Meetings, Annual general meetings, maintaining records of minutes of meetings, and filing of statutory returns, to name a few, compared to a Corporation form of business. However, it is pertinent to note that compliance formalities are still substantially more complex than a partnership or sole proprietorship form of business.
- The Board of Directors looks after the business affairs of the LLC.
- Another characteristic of a Limited Liability Company is that the income of an LLC is treated as the personal income of its members; as such, taxes rates applicable to individuals are applied instead of corporate tax rates. A Limited Liability Company (LLC) characteristics are known as pass-through taxation. The benefit of this feature is that the profits are taxed only once in the hands of the members directly. No double taxation is faced, which is normal practice in the company form of business where income is first taxed at the corporate level and then at an individual level when profit is distributed in the form of a dividend to shareholders.
- There is no limit on the maximum number of members in an LLC. Unlike a company or a partnership firm of business, there are no restrictions on the maximum number of members in an LLC.
- It cannot exist till perpetuity. It has a limited life, ceases to exist, and needs to be dissolved upon death or bankruptcy of its members or if any member leaves the organization.
Advantages of Limited Liability Company (LLC)
Below are the advantages mentioned :
- The first advantages of LLC are that it is easy to form and involves lesser compliance formalities. LLC is not required to conduct the Annual General Meeting and also not required to file its Annual Reports with the appropriate authority of the country in which they are operating.
- The second advantages of LLC are eligible for a pass-through taxation feature, which implies that the company doesn’t pay taxes or take losses. The owners report any profit or loss of business in their personal income tax returns. Thus this form of business avoids double taxation by way of the first tax payment by the corporation and Income tax paid by the individual members on the income received from the corporation.
- The third advantage of LLC protects its members from personal liabilities as their liability is limited to the amount of agreed contribution, and the debtors cannot recover their assets.
Disadvantages of Limited Liability Company (LLC)
Below are the disadvantages mentioned:
- Limited Liability Company (LLC) form is suitable for small businesses. It is not an ideal form of business for business that aspires to go public.
- LLC has to be dissolved compulsorily on the death or bankruptcy of a member. It cannot run till perpetuity like a Corporation. If any member leaves, the business is compulsorily required to be wound up. However, if they wish to continue, the rest of the members can form a new LLC.
Differences Between Limited Liability Company vs Limited Liability Partnership
Here we provide you with the top 3 differences between Limited Liability Company vs Limited Liability Partnership.
|Basis of Comparison||Limited Liability Company||Limited Liability Partnership||Company|
|Definition||It is a form of business that combines the features of partnership and company||It is a kind of partnership where the liability of partners is limited to the capital contributed by them.||It is a kind of business form which is registered under the law of the country. (e.g Company incorporated in India is registered under the Companies Act 2013)|
|Minimum members required||
One or more
Two or more
Two or more
Limited Liability Company (LLC) easily incorporates the form of business that offers various benefits and a handful of challenges. It is up to the entrepreneur to decide which form of business to choose from as all the legal formalities before and after the set up of business lies in the form itself, and as such, this decision should be based upon the eventual goals of the business in question and the mindset of the entrepreneur.
This is a guide to Limited Liability Company (LLC). Here we discuss the characteristics, Advantages, and Disadvantages. You may also look at the following article to learn more –
- Direct Tax vs Indirect Tax
- Short Term vs Long Term Capital Gains
- Simple Interest Rate vs Compound Interest Rate
- Dividends vs Capital Gains