Limited Liability Company

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A Limited Liability Company (LLC) is a business structure that provides limited liability to its owners for the company's debts and obligations.

A limited liability company (LLC) is a legal entity that provides the benefits of both a corporation and a partnership. It offers the limited liability of a corporation and the tax efficiencies and operational flexibility of a partnership.

LLCs are created under state law, so they vary from state to state in terms of how they are formed, what type of business can be conducted by an LLC, who can be an owner, what taxes apply to LLCs, etc. The IRS treats LLCs as partnerships for federal income tax purposes.

This means that profits from an LLC are taxed at individual rates on personal income tax returns (Form 1040), not at corporate rates. An LLC itself does not pay taxes on profits or have any other tax obligations outside those imposed directly on its owners or members. An LLC's owners (called "members") enjoy protection against personal liability for debts incurred by the business; this is called "limited liability."

 

Features Of Limited Liability Company

1. It uses the acronym “Limited” as part of its name.
2. It is an artificial person in the eye of the law.
3. Perpetual Success: The death of one shareholder does not lead to the end of the business, i.e it has an unlimited life span.
4. It is authorized by law to carry on a specific line of business.
5. It is owned by many persons known as shareholders.
6. Legal Entity: The limited liability company is a legal entity because it can sue and be sued

 

Advantages of a Limited Company

 

1. Separate and Independent Legal Entity

A company has a separate, independent and legal existence from its shareholders. This means that it has an identity of its own and can work independently, accumulate assets and take on debt under its own name. It can even own immovable property like real estate or buildings.

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2. Limited Liability

The shareholders have limited liability in case the company is sued for any debts or other encumbrances. The shareholder’s liability is limited to the amount unpaid on his or her shares.

Let us understand this with an example. Suppose, the shareholder has 100 shares of Rs. 10 each of which Rs. 8 has been paid up and the remaining Rs. 2 per share has to be paid. In case any liability requires the shareholders to pay, then our shareholder will only have to pay up to Rs. 200 (Rs. 2 each for 100 shares) and nothing more. 

 

3. Equal Rights of Ownership

The total ownership of the company is denoted by its share capital. This is divided into a number of shares, each with equal nominal value. Each of these shares offers an equal right of ownership. This means any two people, say the promoter of the company and an independent shareholder, have equal ownership in the company if they hold the same number of shares. In case two or more people jointly hold a few shares, then they will be collectively counted as one shareholder. They will jointly have the rights of ownership as granted by their shares. This means that in a shareholder meeting, only one of them can vote and not both.

 

4. Transferability of Shares

Any shareholder can transfer his or her ownership by simply transferring the shares to another person. If the shareholder sells off his or her shares, then the buyer acquires the same rights of ownership as the original shareholder. This feature helps the company survive well beyond the lifetime of the shareholder. 

 

5. Perpetual Existence

A company continues to exist until the time it is wound up. Since shares are transferable, the shares pass on to the nominees or beneficiaries on the death of the shareholder. This means the company will exist well beyond the lifetime of its current shareholders. In case of an OPC, there is a clause for a nominee director to whom the share ownership will pass if the original shareholder passes on.

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Disadvantages of a Limited Company

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 1. Long Formation Procedure

Forming a company is a long job. There are quite a few steps involved including getting the Digital Signature Certificate (DSC), Director Identification Number (DIN), agreeing on and getting approval for the name, preparing the Memorandum and the Articles of Association, agreeing on the directors and getting their consent, etc.

Filling the forms can be a daunting task in itself, leave alone preparing the Memorandum and the Articles. It always helps to seek advice from experts who know how to get the work done without the promoters facing too much of a hassle.

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2. Costly

 There are several costs involved with running a company. For instance, you will have to get the annual accounts audited every year, fill and file a number of forms, deduct income taxes on payments and submit them to the IT department, file the necessary GST returns and pay the taxes, hold board and shareholder meetings, etc. All this involves a cost. In addition to the fees for filings, you will also have to pay the auditors, the tax professionals, etc. You do not have to incur most of these costs in a proprietorship or even a partnership.

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 3. More than a Few Compliance Measures

There are a considerable number of compliance requirements for a company. From keeping certain books of account to maintaining records of meetings, their minutes and resolutions, a company has enough work. Not adhering to these compliance measures means hefty penalties and, in some cases, even imprisonment. That is why it is suggested that companies hire professionals to keep a track of these requirements and ensure that they are met.

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Types of Limited Liability Companies

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There are several types of limited liability companies. These differences impact how LLCs are taxed.

• Single Member LLC – A single member LLC is not treated as a separate entity from its member for tax purposes. In other words, the income of the LLC is included on the tax return of the member.

• Multi-Member LLC – A multi-member LLC has more than one member. Unlike a single member LLC, a multi-member LLC is treated as a separate entity for tax purposes. This means that its members enjoy pass through of profits and losses in the same way partners in partnerships do.

• Non-Profit LLC – A non-profit LLC enjoys the same tax advantages as a non-profit corporation. It also enjoys the flexibility of a partnership and the protections from liability enjoyed by for profit corporations. Not all states allow non-profit limited liability companies.

• Professional Limited Liability Company (PLLC) – A PLLC is a limited liability company organized for the purpose of providing legal, medical, or other professional services.

• Series LLC – A Series LLC is a special limited liability company which allows a single LLC to segregate its assets into separate series as a means of protecting assets from creditors.

 

How do I form an LLC? 

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To form an LLC, all you need is a name for your company, which should include your name or some variation thereof as well as words like "limited liability company," "company," or "corporation." You will also need one person (or more) who will serve as your registered agent with whom official documents can be served when necessary; this person must have a physical address where these documents may be served within Washington state boundaries. You will also need articles of organization filed with the Secretary of State's office; these articles must contain certain information about your organization such as its name, address where it conducts business operations, duration period (if any), whether members have limited liability protection among other things). Finally, you'll need one person designated as managing member who has authority over day-to-day operations and management decisions for your new company while others act only in advisory roles without any decision-making power over operational matters unless otherwise noted in writing by all members/managing member(s).

 

Documents you need to create an LLC

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The following summarizes the documentation requirements for creating an LLC.

1. Internal Revenue Service (IRS) Form SS-4

If you don't already have one, you'll need to obtain an Employer Identification Number (EIN) for your business via IRS Form SS-4. You can download the form to file by mail, or simply apply online and receive your EIN immediately.

Your EIN is used on tax forms and other official documents to identify your business.

 

2. Name reservation application

Before filing any LLC formation documents, you will need to choose a name for your LLC and run an availability search to determine if it's already taken. You can usually run a name availability search on the website of the secretary of state or corporation’s bureau.

Generally, states have specific rules for ensuring that a business name differs enough from those of existing businesses to qualify.

 Each state also has specifications for including corporate designators such as LLC in your business name.

Once you have a viable name, you may file a name reservation form with your state (though it’s not required) to hold it while you file your LLC paperwork.

 

3. Articles of organization

To form your LLC, you must submit to the state articles of organization, also called a certificate of organization (or certificate of formation in some states). You can generally download the appropriate form from the secretary of state website.

When filing your form, make sure to include the correct number of copies. Often, you're required or permitted to submit two copies, one for the state to keep and one to stamp and return for your records. Failing to include the prescribed copies is a common cause of rejected filings.

Each state has its own requirements, but articles of organization generally include the following:

• Business name: Be sure to write your full, legal business name exactly as it must appear according to your state's rules.

• Business purpose: Some states require a specific purpose, while others allow you to state broadly that your business will engage in lawful business activities. For example, in Illinois, professional LLCs must state the specific professional services they will engage in.

• Duration: Some states ask you to specify whether your LLC has a dissolution date. A few states set a statutory limit on the duration of an LLC, but in most cases, you may designate your agreement as perpetual.

• Primary business address: This is the physical location that serves as the base or headquarters of your business operations.

• Ownership: Your agreement must list all members of your company with full contact information. You will also need to indicate what share of the business each member owns.

• Management: Your agreement must specify whether your LLC is managed by its members or by designated managers. Names and full contact information for all managers must be provided.

• Registered agent: Your business must appoint a registered agent who is available during regular business hours to accept delivery of notices of lawsuits, known as service of process, and other official documents. There are companies that provide professional registered agent services for a fee.

 

4. Operating agreement

An operating agreement, also known as a company agreement, establishes the ground rules for running your LLC and the rights and responsibilities of its members. It also confirms how profits and losses will be distributed among them. Usually, members receive profits as income based on their share of ownership.

Operating agreements are not usually required by states as part of the formation process, but they are essential for establishing how your LLC will be governed. All members must sign the document to validate the agreement.

If you want to write your own operating agreement, you can find samples online, but since this is the legal foundation of your business, it makes sense to get input from legal counsel before signing. Generally, operating agreements include the following:

• Business name and address

• Registered agent address

• Formation date and duration

• Member names, roles, and contact information

• Contributions and shares of ownership

• Distribution of profits and losses and compensation plans

• Manager names and contact information

• Meeting schedules and voting rights of members

• The process for adding or removing members

 

5. Initial and annual reports

States need to have accurate, up-to-date records on businesses operating within their borders. To maintain them, most states require LLCs to file periodic reports to confirm basic information about their operations.

States use a wide range of names for these reports, including annual reports, statements of information, franchise tax reports, business entity reports, and annual certificates.

They are often due annually or biennially following the year of formation, but in some cases, they're due less frequently. Pennsylvania, for example, collects them every ten years.

A few states, including Alaska, California, Nevada, and Washington, require LLCs to file an initial report or statement of information at the time of LLC registration.

 

6. Tax registrations

In many states, your LLC will need to register with the department of revenue for one or more tax types. These may include general business entity taxes, employer taxes, and sales and use taxes.

Usually, tax registration requirements and forms are included with business formation resources in the state's business portal.

 

7. Business licenses

Depending on the nature and location of your business, you may need one or more business licenses. Typical licenses for small businesses include the following:

• Home occupancy permits

• Premises permits for features such as signs, alarm systems, and elevators

• Licenses for regulated activities such as food preparation and day-care

• Professional licenses for services such as engineering and architecture

In most cases, you can apply for licenses online through the state corporation’s division.

With all of these documents, it pays to be meticulous. Missing a detail can result in rejected paperwork, sending you back to start over and delaying your approval. Getting sound legal and financial advice as you form your business is a wise investment.

You should retain founding documents for the life of the business. A document management system can simplify the process tremendously.

 

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DISCLAIMER-These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information.

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