Updated November 6, 2023
Definition of Limited Liability Company
A limited liability company is a business structure that protects the business owner or partner’s personal assets, like a house, car, savings, etc., if the business gets into debt or faces legal issues.
Introduction to Limited Liability Company
Starting a business requires an entrepreneur to make several decisions, and these decisions can have a far-reaching impact on the company. Among an entrepreneur’s many choices, one very important decision is regarding the business’s will.
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. The implication is that if a business suffers losses and gets sued, the personal assets of the owners of the LLC cannot be claimed by creditors. Further, this business form can have unlimited owners/members. The rules governing LLCs differ from country to country and are not uniform. Any business form opting for this business uses LLC at the end of the entity’s name. For example, Clear Advisor LLC’s name signifies the company is an LLC.
Even a single member can start an LLC governed by its Memorandum of Association (MoA) and Articles 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 about 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.
- Pass-through taxation, where the income of an LLC is the personal income of its members, is a characteristic of a Limited Liability Company. Applying individual tax rates instead of corporate tax rates is advantageous as it ensures that the profits are taxed only once in the hands of the members directly. Avoiding double taxation, which is a common 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 as a dividend to shareholders, is an advantage of LLCs because individual tax rates are applied instead of corporate tax rates.
- There is no limit on the maximum number of members in an LLC. Unlike a company or a firm partnership business, there are no restrictions on the maximum number of members in an LLC.
- It can only exist once perpetually. An LLC has a limited life and needs to be dissolved upon the death or bankruptcy of its members or if any member leaves the organization.
Advantages of Limited Liability Company (LLC)
Below are some of the advantages:
- The first advantage of an LLC is that it is easy to form and involves fewer compliance formalities. An LLC is not required to file its Annual Reports with the appropriate authority of the country in which it operates or conduct the Annual General Meeting.
- The second advantage of an LLC is that it is 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.
- An LLC offers the advantage of protecting its members from personal liabilities. The reason for this protection is that an LLC limits the liability of its members to the amount of their agreed contribution, and debtors cannot recover their assets.
Disadvantages of Limited Liability Company (LLC)
Below are some of the disadvantages:
- The Limited Liability Company (LLC) form is suitable for small businesses. There are better business forms for a business that aspires to go public.
- LLC has to be dissolved compulsorily on the death or bankruptcy of a member. It can only run once perpetually 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 a 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.||Registering under the country’s law is a requirement for a business form such as a company. For instance, a company incorporated in India must be 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 business format to choose from, as all the legal formalities before and after the setup of the business lie in the form itself. As such, this decision should be based on the eventual goals of the business in question and the entrepreneur’s mindset.
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 –