A limited liability company, LLC, is a form of business organization that incorporates elements of corporations and partnerships.
As such, the owners of this business are given limited personal liability, which allows their personal assets to be secured from the claims of debts in business as well as other litigation. An LLC also allows tax flexibility and management, thus providing an ideal entity for entrepreneurs and small business proprietors.
In this blog, we are going to look at the major characteristics of limited liability companies and how it is different from other business structures.
Features of a Limited Liability Company
The following are the main features of a limited liability company:
Unlimited ownership
In many jurisdictions, LLCs can have an unlimited number of members, making them a flexible option for businesses looking to include multiple stakeholders. There is no limit to the number of people who can own a limited liability company. On the other hand, sole traders can have only one owner while partnerships can have up to 20 (this depends on the country where it is located).
Rewards in the form of dividends
Shareholders receive a regular dividend payment as a reward for investing in the company.
The separation between ownership and control
The people who own the company are not necessarily the people who are running it. This is because directors are appointed by shareholders of a limited company to take care of its day-to-day operations. A few of the shareholders can also be directors.
Legal Requirements
LLCs have fewer regulatory obligations than corporations, making them an attractive alternative for small firms and entrepreneurs. LLCs are not required to convene annual meetings, maintain lengthy minutes, or publish elaborate financial reports, for example. Yet, it is essential to maintain accurate records of all business activities and adhere to all current rules and regulations.
Shares
The main source of funding for limited companies is the issue of shares. Once it issues shares, existing or new shareholders can buy them and therefore own a part of the company. This way, the company will be able to raise money, and the shareholders can receive a dividend.
Disadvantages of LLCs
While a Limited Liability Company (LLC) offers many benefits, such as liability protection and tax flexibility, it also has some drawbacks.
Self-Employment Taxes
Members of an LLC must pay self-employment taxes on their portion of the profits, which are usually higher than corporate taxes. The LLC owner cannot receive dividends like a corporation shareholder, whose dividends are taxed at a reduced rate. In an LLC, the owners must pay both employer and employee portions of Social Security and Medicare taxes as if they were self-employed.
Limited Growth Potential
Limited liability companies cannot issue stock to raise capital, whereas corporations can do so. Therefore, it becomes harder for the LLC to attract investors because the latter usually want to invest in corporations (C-Corps) that will offer shares for raising funds. Therefore, it might be a problem for the LLC to scale up if substantial outside investment is needed.
State-Specific Regulations and Fees
Limited liability companies are governed by different state laws and fees, which may add complexity and cost to the maintenance of the business. For example, some states impose franchise taxes or annual reporting fees, making LLCs more expensive to operate than sole proprietorships or partnerships. Some states also have restrictions on LLC structures, especially for professional services businesses.
Conclusion
LLCs have several benefits that make them an attractive corporate structure for small-enterprise owners. They provide protection from liability, a flexible management structure, pass-through taxes, and a flexible ownership structure. LLCs are also reasonably simple to organise and operate, and they provide a high level of confidentiality. Nevertheless, they can have drawbacks, such as greater expenses and less established legal protections compared to other company arrangements. When selecting an LLC as a business structure, it is essential to examine the pros and downsides and contact a skilled business attorney or accountant.
