When a group of people gets together for business, they create a legal entity known as the company. The purpose of the formation of the company is to manage and organize financial and tax liabilities depending on the country’s laws.
Now, the question is why not a personal business and why to form a company. It’s because the company offers a lot of advantages in terms of taxes and liability.
What is Limited Liability Company
A limited Liability Company is a type of business company where owners don’t have to pay for the company’s liability and debt. It is not a corporation, and it falls in the category of hybrid entities. It means that LLC has the characteristics of both corporations and sole proprietorship. It provides the advantage of limited responsibility like corporations and single taxes like the partnership and sole proprietorship.
Characteristics of Limited Liability Company
We either see sole proprietorship/partnership or corporation, but we don’t often come across with LLC. Because it’s a hybrid type, a combination of both, some of the characteristics LLC are as follows;
Separate Legal Entity
As a separate legal entity means that LLC is legally divided and separate from its owners. In simple words, LLC can run its business operations and carry on even if all the members have withdrawn from it. When then do, it would recruit and hire new people, buy and sell assets, and other stock of the company. In case of any misconduct, LLC would defend itself in the court of law.
Protect Limited Liability
One of the most popular characteristics of LLC is the limited liability of its members. If the company is involved in any kind of litigation or found guilty of bankruptcy, then its members don’t have to pay from their income and assets. Its members won’t be responsible for the company’s action. Banks and creditors can’t accuse its members of the company’s default and come after its members.
LLC members will be liable and have to take responsibility for the misconduct and wrongdoings of other LLC members. It is not like a partnership, where every partner is liable for the actions of other partners.
The characteristics of LLC that we have discussed so far provide the advantages of a corporation. Taxation is one of those things that don’t go well with corporations, because they have to pay double taxes. IRS doesn’t have a specific provision for the LLC, whether to tax like corporation or partnership.
If you’re planning to tax like a partnership, then you have to pass the taxes through the personal tax return of its members. That’s how you would be able to avoid double taxes, because LLC doesn’t pay income taxes.
Operation & Management Flexibility
When we talk about the functionality of corporations, then there are so many formalities are involved like an annual board meeting, shareholders meetings, and other meetings where corporations are legally bound to record every minute of the meetings.
The functionality of LLC is much simpler and easier where it doesn’t have to conduct meetings and record every minute of it. Management of record and other operations are also much simpler than the corporation. The roles of members are also flexible comprising of casual day to day activities. But it’s important to be familiar with the LLC laws of the country before starting it.
Types of Limited Liability Company
Some of the types of limited liability company are as follows;
Single Member LLC
Single Member LLC, as the name implies, is comprised of only one member. However, the law doesn’t treat single-member LLC a separate legal entity. Therefore, its income has to pass through the tax return of its member for taxes.
Apple started as a single-member LLC when Steve Jobs created the computer in his parents’ garage.
Multi-member LLC is comprised of more than one member. Unlike single-member LLC, the law treats multi-member LLC a separate legal entity. Therefore, they can enjoy the advantages of corporations and partnerships.
Facebook and Microsoft are the world’s leading tech companies, and they started as a multi-member LLC.
As the name implies, such companies are not for profit. Therefore, they can enjoy the no tax benefits like churches and can have limited liability and flexibility like partnerships and corporations. But some countries do not allow the formation of non-profit LLC.
Professional Limited Liability Company
People having a professional license like the doctor, engineer, architect, or lawyer can create PLLC. The purpose of creating professional LLC is to provide medical, legal, and other services.
IBM, Sony, Pepsi-Cola, Nike, Blackberry, and eBay are some of the famous LLC in the world.
LLC Vs Corporation
Limited Liability companies comprise of few members like corporations. But the law treats them as a sole proprietorship or partnership in terms of taxes, and it provides flexible liability like corporations. It also goes by the name of S Corporation, S means sole Proprietorship that it has a tax advantage.
Corporations, on the other hand, comprise of members (shareholders and board of directors), and the laws them a separate legal entity that provides limited liability, but the income is taxed twice. It goes by the name of C Corporation.
Advantages of Limited Liability Compan
Some of the advantages of limited liability company are as follows;
LLC has an option of taxation that whether they want to be taxed like a partnership or corporation; single taxes or double taxes depending on their choice. Usually LLC prefers single taxes.
LLC doesn’t have a restriction on the number of its members. They can have as many members as they want. They also have flexibility over the membership style like trusts, estate, organization, etc.
The management of LLC also has the flexibility of choosing the management style whatever they choose. Like corporations, they don’t have to follow the pre-decided set of rules.
Another for the flexible management style of LLCs that they involve fewer formalities. They don’t have to conduct monthly and annual meetings, prepare reports, calling all the shareholders for the meetings, and record and documenting everything.
Safe Personal Asset
One of the most important benefits of LLCs, that your assets like house, car, and bank balance remain safe like corporate shareholders. In case of bankruptcy like sole proprietorship and partnership, you have to liquidate your asset to meet the demands of creditors. But it doesn’t happen in the case of LLC.
Disadvantages of Limited Liability Company
Although LLC has many tax and liability benefits; but it is very difficult to raise capital for the company. People prefer investing their capital in corporations rather than LLC because they see LLC as a risky investment.
It’s very difficult to transfer your ownership in LLC than corporations. That’s why people prefer corporations, where transferring ownership is much easier.
Factors like no board of directors and difficulty in transferring ownership make the life of LLC limited.
After carefully studying the article, we have concluded that Limited Liability Company offers a lot of advantages and benefits, only if you have no difficulty raising capital for your business. If you have a team that is willing to invest time and resources, then you should choose LLC. Otherwise, corporations or partnerships would be good options.