Advantages And Disadvantages Of a Limited Liability Company (LLC): Limited Liability Company (LLC) is a type or form of for-profit incorporated company where ownership is divided into shares, and where the governing rules are set forth in a contract entered into by all of the initial shareholders. The name derives from the fact that regardless of potential losses or even bankruptcy of the corporation, individual shareholders will bear a maximum liability of the price they paid for their shares.
In a Limited Liability Company, the owners are not personally liable for the company’s debts or liabilities. Limited Liability Companies are hybrid entities in the sense that they combined the characteristics of a corporation with those of a partnership or sole proprietorship. The owners of a Limited Liability Company are generally called ‘members’.
Membership of a Limited Liability Company is usually not restricted. This means that anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other Limited Liability Companies, although some entities such as banking and insurance companies may be restricted from forming Limited Liability Companies. The regulation guiding Limited Liability Companies may vary from state to state, although variety in its regulation won’t be substantial.
Unlike in corporation, double taxation is avoided in a Limited Liability Company by its system of allowing the profits to be passed through directly to the investors so that they are taxed only once, as part of the investors’ personal income. Limited Liability Company is a legal entity created according to the statutes of the state where the entity is formed. Limited Liability Company can be managed by its members or designated managers of the Limited Liability Company.
Having highlighted a general overview of what a Limited Liability Company is all about, Limited Liability Company it not without intricacies, while some operates as advantages, some qualifies as disadvantages.
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Advantages (Merits) of Limited Liability Company (LLC)
1. Members’ Protection from Personal Liability: Limited Liability Company protects its members’ personal assets from liabilities of the business. This is due to the fact that Limited Liability Companies are legal entities separate from its members. This is an advantage attributable to a corporation. In a Limited Liability Company, the members are not personally liable for the debts and liabilities of the company, unlike in partnership.
In a case of the company’s debt or liability, the assets of the company is proceeded against and not the personal assets of its members. This applies even in respect to court orders. The court can only make orders in respect to the company’s asset and not the personal assets of its members. Of course, this benefit is not obtainable in a partnership or sole proprietorship. This members’ protection from personal liability is one of the key advantages of a Limited Liability Company.
2. Legal Personality: Limited Liability Companies are deemed to be legal persons. They can sue and be sued in their own capacity. They can own properties, employ staff, broker and enter into contracts in its own capacity.
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3. Management Flexibility: Limited Liability Company enjoys high level of flexibility in the management if their business. The operation of the company is determined by written agreement between its members.
Limited Liability Company can be managed by its members or designated managers. Its members can get involved in the day to day activities and running of the company. Unlike standard corporations, Limited Liability Companies are not required ti have Board of Directors, annual meets or strict book requirements. The business is run in their own terms.
4. No Membership Restriction: Membership of a Limited Liability Company is not limited to any number. Unlike in a partnership that must have at least two people as the partners, Limited Liability Company is not concerned with the number of members.
One person san for a Limited Liability Company, although some state laws may differ in this respect. Members can be natural persons, artificial persons and even other Limited Liability Companies.
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5. Tax Flexibility: Double taxation is avoided in a Limited Liability Company. The system allows profits to be passed through directly to the investors so that they are taxed only once as part of the investors’ personal income. It also enjoys the flexibility to choose whether to be taxed as a sole proprietorship, partnership or corporation.
If they adopt the tax regime of corporations, then they cannot avoid double taxation. The way double taxation operates is that the company would be taxed at the corporate level as well as having its members taxed when they receive their dividends. This will be the case if they adopt a corporation’s tax regime, otherwise, they are only taxed once and that it at the individual level from their personal income.
6. Easier to set up and run than corporation: Limited Liability Companies are relatively easier to set up and run when compared to corporations. All that is needed to set up a Limited Liability Company is the filing of the Articles of Association and drafting of the Company’s Operation Agreement.
The corporate demands and formalities of Limited Liability Company are flexible and accommodating. Members need not always be available. They have their time to engage in other businesses, since there are less paper works and no regular meeting of members.
7. Allocation Flexibility: Members are free to determine the ratio of the company’s income distribution. In a Limited Liability Company, the amount of money that members invest into the business does not need to equal their percentage of ownership.
When a Limited Liability Company is formed, members create an operating agreement in which different percentages of the company profits and losses can be assigned to members regardless of the amount of their initial investment.
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Disadvantages (Demerits) of Limited Liability Company (LLC)
1. Cost: The cost of forming and maintaining a Limited Liability Company is usually greater than it would cost for sole proprietorship and partnership. The general cost varies from state to state. This may extend to certain additional tax payment such as self-employment tax and franchise tax, etc.
2. Diverse State Laws: The possible diversity in state laws regulating Limited Liability Company renders its operation less predictable.
3. Transfer of Ownership: For a member of a Limited Liability Company to transfer his interest to another person, the approval of all the members must be obtained first.
The process of transfer of ownership is therefore boisterous in a Limited Liability Company, unlike in corporations where one could easily sell off his shares to another person.
4. Prohibition of certain entities: Entities such as banking and insurance companies and in some states, law firms and medical offices are prohibited from forming a Limited Liability Company.
5. Perpetual existence not guaranteed: Perpetual existence of a Limited Liability Company is not guaranteed. This is because the company may be dissolved upon death of its members, since transfer of ownership is not its common feature.
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Limited Liability Company just from its name is primarily targeted at getting people involved in a business without exposing them to personal liabilities. It is a recommendable option of business type for start-up individuals and entities. What renders it most preferable is that it has in it both nature of a partnership and that of a corporation, thus, it is a hybrid form of business type. Amidst its perceived disadvantages, it seems however that its advantages tremendously outweighs the disadvantages.
Edeh Samuel Chukwuemeka, ACMC, is a lawyer and a certified mediator/conciliator in Nigeria. He is also a developer with knowledge in various programming languages. Samuel is determined to leverage his skills in technology, SEO, and legal practice to revolutionize the legal profession worldwide by creating web and mobile applications that simplify legal research. Sam is also passionate about educating and providing valuable information to people.