Characteristics of Limited Liability Company
Characteristics of limited liability company include separate legal existence, limited liability, flexibility in taxation, and simplicity in operation.3 min read
Characteristics of limited liability company include separate legal existence, limited liability, flexibility in taxation, and simplicity in operation.
What Is a Limited Liability Company (LLC)?
A Limited Liability Company or LLC is a business structure in which the owners or members have limited liability with respect to the actions of the company. An LLC offers the members the benefit of personal liability protection, meaning that the business liability cannot be recovered from the personal assets of the owners.
An LLC is formed and operated under state law. Its characteristics are similar to that of a corporation and a partnership business. Its dissolution too is governed by the state's law.
The Advantages of a Limited Liability Company
An LLC offers the following advantages:
- You can form a limited liability company with just one member.
- You can have a whole company as a member of an LLC.
- The owners of an LLC are protected against the business liabilities of the company.
- The operations of an LLC are managed by the managing members. Since there is no board of directors, there are no requirements for holding regular board meetings.
- It requires very little bookkeeping; financial and administrative requirements are also simple.
The Disadvantages of a Limited Liability Company
Operating as an LLC has the following disadvantages:
- You must pay employment tax on company earnings.
- An LLC is like a partnership business; you cannot make profits from incentive stock.
- Since LLCs are governed by state law, different rules apply in different states. Tax treatment also varies with the state. You may have to pay tax in some states while no tax may apply in others.
Characteristics of a Limited Liability Company
Separate Legal Existence
An LLC has a separate legal identity from its owners, aka its members. In case of an unincorporated partnership, the owners own property and incur debt collectively as a group of individuals. However, an LLC can legally transact business and enter into contracts in its own name. It can own property and institute lawsuits as a separate legal entity. Subject to state law, an LLC usually continues to exist even after the withdrawal of one or more members.
An LLC offers limited liability protection to its members. Unlike the case of a partnership business, where a partner may be responsible for the acts of other partners, LLC members are only responsible for their own actions and they cannot be held responsible for torts and civil wrongs committed by other members of the company. Due to the limited liability feature, it becomes easier to scale up the business without risking your personal assets.
Flexibility in Taxation
LLCs also offer a lot of flexibility in terms of tax treatment. The IRS does not recognize LLCs as a separate tax entity. Hence, you must file your LLC taxes either as a sole proprietorship (if it's a single-member LLC) or as a partnership (if it's a multi-member LLC). You can also elect to file your taxes as a C-Corporation or an S-Corporation. Thus, an LLC gives you the flexibility to choose the way you want to be taxed.
Simplicity in Formation and Operation
While an LLC offers you the benefits of a corporation, you still get to enjoy the simplicity of a partnership business in terms of forming and operating the company. Formation formalities and filing requirements remain simple for LLCs.
In most of the states, you are not required to hold an annual meeting of members and file the minutes of the meeting. Limited liability companies usually do not have a board of directors; they are either member-managed or manager-managed. They also need very less record keeping compared to corporations.
Owners as Members
The owners of an LLC are called its members. The members can either manage the company themselves or appoint one of the members to manage the day-to-day operations of the company. The members can also choose to appoint a professional manager.
Forming an LLC
To form an LLC, you must prepare and file articles of organization with the state agency (usually the Secretary of State) where the principal place of business is located. Most of the states have a standard form for submitting articles of organization. Contrary to the common misconception that the associated paperwork for forming and operating an LLC is similar to that of a corporation, the documents required are simple and minimal.
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