What Is Limited Liability Company? Definition, Types & Examples.
When individuals join forces to conduct commercial activity, they are said to have formed a corporation, which is a legal body.
The purpose of setting up the company is to coordinate the administration of financial and tax obligations according to local laws.
The question that needs to be asked now is why a company should be formed rather than a personal business.
This is because the corporation provides many benefits in taxes and responsibility.
An LLC, also known as a limited liability company, is a legal business entity whose members are the owners.
This type of business organization is easier to organize and run than a corporation, and it offers greater liability protection than a sole proprietorship.
This article will describe how a limited liability company (LLC) operates and the stages required in establishing one.
Additionally, this article will review the advantages and disadvantages of forming a limited liability company (LLC).
What Is a Limited Liability Company?
An LLC, an acronym for limited liability company, is a corporate structure in the United States that shields its owners from personal liability for its obligations and debts.
Limited liability companies combine elements of a corporation with a partnership or sole proprietorship to form a hybrid entity.
The limited liability company is comparable to that of a corporation, but, unlike partnerships, LLC members are not eligible for flow-through taxes. This characteristic is exclusive to partnerships and not available to LLC members.
A limited liability corporation (also known as an LLC) is a form of commercial enterprise in which the owners are exempt from financial responsibility for the obligations and liabilities of the company.
It does not qualify as a corporation but rather as a hybrid entity because of its structure.
That means that an LLC possesses the qualities of both a corporation and a sole proprietorship at the same time.
It offers the benefit of restricted liability, similar to corporations, and the advantage of single taxation, similar to partnerships and sole proprietorships.
State laws authorize limited liability companies, but the regulations governing such businesses are different from one jurisdiction to another. The term “members” is commonly used for the individuals who own an LLC.
Many states do not place any restrictions on ownership, which means that anyone, including individuals, businesses, foreigners, foreign entities, and even other LLCs, can become a member of the business.
However, financial institutions and insurance businesses cannot incorporate limited liability organizations (LLCs).
A limited liability company, sometimes known as an LLC, is a legal partnership arrangement that calls for filing articles of organization with the state.
Forming a limited liability company (LLC) is far simpler than forming a corporation, and it offers its investors greater security and flexibility.
LLCs have the option to opt-out of directly paying federal taxes. The owners instead report profits and losses for the company on their tax returns. The limited liability company can change its legal status to a corporation.
A corporation’s members may be held liable if fraud is discovered within the organization or if the organization fails to follow the legal and reporting requirements.
What Are Characteristics of a Limited Liability Company?
The majority of limited liability companies we come across are sole proprietorships and partnerships; corporations are rarer.
The hybrid nature of LLC means that it possesses a variety of properties, including the following:
Protect Limited Liability
Members of LLCs enjoy restricted liability, which is viewed as one of their most attractive features.
The firm members are exempt from paying out of their income and assets if the firm is found to be in bankruptcy or involved in litigation.
Its members are exempt from liability for any actions taken by the company. Banks and other creditors cannot blame the default on the company’s members and cannot go after those members.
Members of an LLC will be held liable and required to accept responsibility for the actions and infractions committed by other members of the LLC.
This is not the same as a partnership, in which each partner is responsible for the acts of the other members in the partnership.
An entity with its lawful existence
Limited liability companies (LLCs) are legally separate from their owners since they are distinct legal entities.
In other words, even if all members of the LLC leave, the business will continue to function and grow, even though they are not members any longer.
When that time comes, it will search for new employees and hire them and buy and sell the company’s assets and other shares. The LLC would defend it in court in the event of wrongdoing.
Flexibility in Operations & Management
A company’s operations are complex, involving several formalities, such as annual board meetings, shareholder meetings, and other meetings that corporations must record.
The operation of an LLC is significantly simplified and facilitated because it is neither required to hold meetings nor record the minutes of those sessions.
The management of records and other procedures in a company is much less difficult than in a corporation.
The roles and responsibilities of members are equally flexible, consisting of daily ad hoc activities.
To begin, however, you need to have a solid understanding of the regulations governing LLCs in your country.
Tax flexibility
The benefits of a corporation are provided by the qualities of an LLC that we have been discussing until this point.
As taxation is required for corporations to pay two sets of taxes, taxation does not go well with corporations.
The IRS does not have a provision that specifies whether a limited liability company should be taxed as a corporation or a partnership.
If you are going to treat the business as if it were a partnership for tax purposes, you will need to file individual tax returns for each member of the partnership.
LLCs are exempt from paying income taxes, thus allowing you to avoid paying taxes more than once.
What Are The Types of Limited Liability Companies?
The following are types of limited liability companies;
Single Member LLC
A Single Member LLC, as its name suggests, consists of only one member in its organization.
However, an individual limited liability company is not recognized as a separate legal entity by the law.
Therefore, to pay taxes on it, its revenue needs to be reported on the tax returns of its members.
When Steve Jobs first built a computer in the garage of his parent’s home, Apple was formed as a limited liability company with a single member.
Multi-member LLC
A limited liability company with multiple members is referred to as a multi-member LLC. The law recognizes a multi-member limited liability company as a distinct legal entity, unlike a single-member limited liability company.
As a result, they can take advantage of the perks of corporations and partnerships.
Both Facebook and Microsoft began as multi-member limited liability organizations before becoming two of the most successful technology businesses in the world.
Non-profit LLC
These businesses do not seek to maximize shareholder value, as their names imply.
As a result, they can take advantage of the tax-exempt status offered to churches and the restricted responsibility and flexibility offered to partnerships and corporations.
However, forming an LLC not for profit, is prohibited in some nations.
Professional Limited Liability Company
Professional Limited Liability Company can be established by individuals who hold appropriate professional licenses, such as doctors, engineers, architects, or lawyers.
The provision of services in various fields, including medicine, law, and others, is the reason for establishing a professional limited liability company.
Famous LLC
Some of the most well-known companies globally are limited liability companies, including Pepsi-Cola, Nike, IBM, Sony, Blackberry, and eBay.
What Is the Difference Between LLC and Corporation?
Limited liability companies have a limited number of shareholders, similar to corporations. They are considered sole proprietorships or partnerships for taxation purposes, but they have flexible liability, just like corporations. This company is also known as an S corporation, which refers to the fact that it is treated as a sole proprietorship for tax purposes.
A corporation, by contrast, is governed by laws that maintain that it is a separate legal entity with members (shareholders and directors). This separate legal organization offers limited liability protection, but the income is taxed twice. It is known as a “C Corporation” in the business world.
What Is The Difference Between a Limited Liability Company and Partnership?
The major distinction between a partnership and a limited liability company (LLC) is that the former keeps the company’s commercial assets distinct from the personal assets of its owners, so shielding the owners from financial responsibility for the LLC’s obligations.
The limited liability company (LLC) and the partnership can pass on their profits to their owners and the tax burden.
It is possible to use their losses toward other revenue, but only to the extent, they have invested in the business.
Form 1065 must be submitted if the limited liability company (LLC) was originally organized as a partnership.
Form 1120 must be submitted if the members have chosen to have the organization be classified as a corporation.
An LLC’s business continuation agreement can be utilized when one of the owners leaves the business or passes away.
The remaining members of an LLC are required to wind down and restart the business in the absence of such an agreement.
What Are The Advantages of a Limited Liability Company?
There are several advantages to forming a limited liability company; here are some of them:
Unlimited Members
The number of people who can be members of an LLC is not limited. They are free to have any number of members that they like.
They also offer freedom concerning the membership style, such as trusts, estates, organizations, etc.
Tax Features
The method of taxation that an LLC chooses, either that of a partnership or that of a corporation, results in either a single tax rate or a double tax rate, depending on the entity’s preferences. LLCs typically prefer single taxation.
Fewer Formalities
Limited liability companies (LLCs) involve fewer formalities due to flexible management styles.
As a result, they are not required to conduct meetings on a monthly and annual basis, prepare reports, call shareholders to meetings, and document everything.
Flexibility in management
Management in an LLC may also choose whatever style of management they prefer. They are not required to adhere to the previously agreed set of norms, similar to corporations.
Safety of Asset
One of the most significant advantages of forming a limited liability company is that personal asset, such as your home, car, and bank balance, are shielded from corporate shareholders’ claims.
You must liquidate your assets if you file for bankruptcy, whether you are a sole proprietor or a partnership. LLCs, on the other hand, are not subject to this problem.
What Are the Disadvantages of a Limited Liability Company?
Here is a list of disadvantages of a limited liability company:
Costly
A limited liability company has several advantages in terms of taxes and responsibility, but obtaining financing through one is extremely challenging.
Generally, people prefer investing in corporations over limited liability companies (LLCs), as LLCs tend to be considered riskier investments.
Limited lifespan
The lifespan of an LLC is capped due to factors such as the absence of a board of directors and the challenges involved with transferring ownership.
Transfer of Ownership
When compared to corporations, limited liability companies (LLCs) have an extremely complicated ownership transfer process.
People favor corporations because it is simpler to change ownership in a company than in a sole proprietorship.
How Does Limited Liability Work?
For tax reasons, the Internal Revenue Service will treat your company in the same manner as if it were a sole proprietorship if it is a single-owner limited liability company.
That eliminates the requirement for the limited liability company (LLC) itself to submit a tax return to the IRS.
You must report both your profits and losses when you file your taxes since you are the business’s sole owner.
The Internal Revenue Service considers your company a partnership if it is a multi-owner limited liability company (LLC).
The co-owned LLC does not have to pay income taxes on its behalf. Instead, the LLC members are responsible for reporting and paying taxes on their respective portions of the business’s profits on their tax returns.
The IRS requires you to report your “distributive share,” which represents the portion of the LLC’s earnings and losses that belongs to each member, even if your LLC has not distributed profits or losses to you.
The multi-owner limited liability company must file Form 1065 with the IRS. The IRS examines this return because it contains information about the shares of the LLC members, which is used to ensure that they are reporting their income accurately.
You can choose for your limited liability company (LLC) to be treated as a corporation, resulting in a lower overall tax burden for your business. This option is available to both single-member and multi-member LLCs.
How To Start a Limited Liability Company?
Here is a rundown of what needs to be done to establish an LLC for business owners considering going that route.
You should be aware that the prerequisites for each state may differ, but the following guidelines are universal and should be followed regardless of where you live.
Select an available business name
You will not be permitted to use a name that has already been taken, and many states provide a method to discover whether or not the name in question is still available.
“To limit trademark infringement lawsuits and confusion, choosing an original and unique name is essential,” said De Jesus.
“This is especially true when picking a business name.” “If you have chosen an available name, but you are not yet ready to submit the LLC forms, you may want to reserve the name you have chosen to ensure it is not taken before you file.”
“If you have chosen an available name, you have yet to file your LLC documents.” The amount of time allotted for reservations will differ from one state to the next.
Select a registered agent.
A registered agent is a person or corporation located in the state you are filing who will accept official paperwork on behalf of your limited liability company (LLC).
A registered agent acts primarily as a conduit via which information is communicated to you in its entirety. In the majority of states, you are required to do this.
Preparation of the LLC operating agreement.
De Jesus recommends developing one even though it may not be necessary for some jurisdictions.
It is essential to have a plan that outlines how your limited liability company (LLC) will operate.
The operating agreement contains specific information regarding the
- The nature of the company.
- Executive leadership team
- Voting criteria.
- Transfers and sales of shares are restricted.
- Profit and losses of a company.
- Company dissolution, if needed.
Put together articles of organization and file them with the state.
Applicants for a limited liability company (LLC) must file articles of incorporation with the secretary of state. Filling out this form requires knowing your limited liability company’s name, address, and purpose (LLC).
There may be differences in the filing fee and how the articles of organization are titled based on the jurisdiction. For example, in some states, the articles of organization are known as the certificate of formation.
There are ways to get started with this procedure that may be found on websites like LegalZoom and NOLO.
You may also contact an accounting firm or an attorney in your area for assistance in forming your limited liability company (LLC).
What Are The Examples of Limited Liability Company?
Alphabet may not be a household name, but Google, the company’s subsidiary, certainly is. It was established in 2015 and is home to many companies operating in a variety of industries, including medical research and wearable technology.
China Mobile claims to be the largest mobile network globally and serves the most mobile subscribers. Hong Kong Special Administrative Region and the mainland of China hold the majority of the market share for telecommunications services.
Berkshire Hathaway is not a technology company, but it is still a very substantial company originally established in 1888 as a textile company.
The railroad, insurance, and utility industries are some of the diverse industries included in the industry. The well-known investor Warren Buffett holds a portion of the ownership in this.
Another well-known limited liability corporation, Exxon Mobil, is the largest gas and oil firm globally.
It had held the top spot the previous year, but it fell to number five this time. In 1999, Exxon and Mobil came together to establish this corporation, which was known as ExxonMobil.
Johnson and Johnson is a massive corporation that has been in business for quite some time. It is involved in the distribution of pharmaceutical products in several nations.
GE, or General Electric, is one of the older corporations on this list. Thomas Edison founded the Edison Electric Light Company in 1878 when General Electric started and became known as GE.
It is the only firm now included in the Dow Jones Industrial Index that was also included in the index when first compiled in 1896.
Final Words on a Limited Liability Company
Limited liability companies could be a good choice if you are not having trouble finding investors for your business because they come with several benefits and advantages. However, this is the case only if you don’t anticipate any problems in the future.
If you have a group of people who are willing to devote time and resources, an LLC is the best option for you. In that case, corporations and partnerships are both viable alternatives to consider.
