Limited liability company

A limited liability company (denoted by L.L.C. or LLC) is a legal form of company offering limited liability to its owners. It is similar to a corporation, but is suitable for smaller companies with restricted numbers of owners.

The concept of a limited liability company was developed in Germany in 1892 as the Gesellschaft mit beschränkter Haftung (GmbH). Unlike a public limited company, it can only have a limited number of owners. Limited liability keeps all the directors possessions safe, this may include their car, house, etc..

In the world

The names and exact legal and tax implications of the limited liability company vary from country to country.

• In the United Kingdom and Ireland, a limited liability company is called a private limited company by shares and is designated as "Limited" or "Ltd." Formerly, all limited companies, both public corporations and private limited liability companies, were designated as Limited; now, public companies are designated as public limited company (plc) and private companies as Limited. However, limited liability companies are taxed at corporate rates, and dividends to shareholders are further taxed.

In 2002 the UK legislated limited liability partnerships ("LLPs") into existence, which more closely proximate LLC's in the USA. Member partners are taxed at the partner level, yet the LLP provides limited liability from LLP liabilities for the member partners.

• Australia, New Zealand, and South Africa also use Limited (Ltd), or sometimes a variation, Proprietary Limited (Pty Ltd).
• in Belgium, it is called BVBA (Besloten vennootschap met beperkte aansprakelijkheid).
• in Bulgaria it is called OOD (Drujestvo s ogranichena otgovornost): Дружество с ограничена отговорност (ООД).
• in Colombia you can find: LTDA (Limited Society), S.A. (Anonymous Society), EU (one-person Enterprise) and others
• in Czech Republic it is called s.r.o. or spol. s r.o. (společnost s ručením omezeným)
• in Denmark, this is called an ApS (Anpartsselskab).
• in France, a S.A.R.L. (Société à Responsabilité Limitée).
• in Germany, Switzerland, and Austria: a Gesellschaft mit beschränkter Haftung, often shorthanded as GmbH.
• in Hungary it is called KFT. (Korlátolt felelősségű társaság)
• in Indonesia it is called PT (Perseroan Terbatas)
• in Italy, it is called S.r.l. (Società a responsabilità limitata)
• in Latvia it is called SIA (Sabiedrība ar Ierobežotu Abildību)
• in The Netherlands, a B.V. (Besloten vennootschap).
• in Pakistan it is Private Limited, shorthanded as Pvt. Ltd.
• in Poland it is called Sp. z o.o. (Spółka z ograniczoną odpowiedzialnością or Spółka z o.o.)
• in Romania it is called SRL (Societate cu Răspundere Limitată)
• in Russia you can find: OOO (Society with Limited Responsibility) (Общество с ограниченной ответственностью)
• in Singapore it is Private Limited, often shorthanded as Pte Ltd.
• in Slovenia it is called d.o.o. (Družba z omejeno odgovornostjo)
• in Spain it is called S.L. (Sociedad de responsabilidad Limitada)

United States

The limited liability company form was introduced relatively recently to the United States. An LLC provides limited personal liability to owners of its equity interest, similar to a corporation and a limited liability partnership and in contrast to a general partnership or sole proprietorship. A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers, physicians, or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC"). Although some people refer to LLC as "limited liability corporations", the correct terminology is "limited liability company".

Basically, an LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. An advantage of an LLC over a limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations; because of the lack of requirement for annual meetings of shareholders (LLCs have "members") or bylaws, for instance - however, most LLCs will choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states such as New York require an operating agreement.

For purposes of U.S. tax law, a curious feature of the LLC--a feature unknown to many business people and even some accountants--is that an LLC can elect how it should be treated for federal and often for state income tax purposes. An LLC with one owner, for example, is treated as a sole proprietorship by default (when an LLC has a single owner - either an individual or an entity - it is a disregarded entity for federal tax purposes) but this one owner LLC can also elect to be treated as a C corporation or as an S corporation. Further, an LLC with more than one owner is treated as a partnership by default but a multiple owner LLC can also elect to be treated as a C corporation or as an S corporation. To elect C corporation treatment, an LLC files a form 8832 with the IRS. To elect S corporation treatment, an LLC files a form 2553 with the IRS.

One reason that businesses choose to be organized as an LLC is to avoid "double taxation." A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), then those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.

Another reason that businesses choose to be organized as an LLC is to exploit the tax classification flexibility that LLCs allow. A new business experiencing losses might choose to operate as a sole proprietorship or partnership in order to pass through those losses to the owners. A slightly more established business might operate as an S corporation to save on self-employment taxes. A large mature business with many owners might operate as a C corporation.

LLC v. LLP

A limited liability company (LLC) differs from a limited liability partnership (LLP) in that the LLP has the organizational flexibility of a partnership. Furthermore, LLCs are more likely to be subject to a state's franchise taxes...

LLC vs. Inc. & Ltd.

Advantages of an LLC

• No requirement of an annual general meeting for shareholders
• Pass-through taxation (i.e. no double taxation).
• Limited liability (meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC)
• Using default tax classification, profits taxed personally (at the member level, not at the LLC level).
• Check-the-box taxation. A LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
• Can be set up with just one natural person involved.
• Membership interests of LLC's in some states can be assigned, providing the assignee with the economic benefits of distributons of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See Delaware LLC Act).
• LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other states they are not considered to have separate juridical standing from their members.

Disadvantages of an LLC

• Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors. Note: To my knowledge, New Jersey does not charge an LLC a franchise tax.
• It may be more difficult to raise capital for a LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual initial public offering.
• The possible lack of any operating agreement requirement can cause problems
• Short life span. Average life span of a LLC is 30 years because of death of one of the owners. In some cases this rule can be bypassed if there is a consensus among all the other members and it is spelled out in an operating agreement (Most states now allow LLCs to have perpetual duration (like corporations) and LLCs are generally not dissolved as a result of the withdrawal of any one member).
• Some people, such as new businessmen or low-level clerks, may not be familiar with the LLC structure and may demand actions by Directors or by Shareholders or officers. While an LLC may establish something akin to a board of directors and can designate officers, it is not required to do so. Thus, a low level clerk's insistence on a signature of a President may require an LLC to appoint a President in order to get around the red tape.

See also

• Limited liability
• Types of companies

External links

• How to Form an LLC
• LLC History
• Nolo site on LLCs
• LLC vs Corporation