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Advantages and Disadvantages of a Limited Liability Company (LLC)

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Limited Liability Company

Limited Liability Company is a hybrid business entity having some features of a corporation, a partnership or sole proprietorship business. It is more of an association than a corporation. It is seen that many people choose the Limited Liability Company as their form of business, mainly because of the ease in set up and operation. It is more preferable for a single owner.

Main Difference from other forms of Business

The main difference of a Limited Liability Company, from other forms of Business are:

i) The only point an LLC differs from Sole proprietorship is that in case of an LLC, the owners are not open to personal liability.

ii) LLC differs from Partnership with the fact that it does not subject the owners to the consequences of bad legal or financial decisions by one partner.

iii) LLC differs from a Corporation where it does not have double taxation on profits.

Advantages of Limited Liability Company

Some of the advantages of starting an LLC are as follows:

  • Limited Liability Companies, much like corporation, provide protection for their owners. If the organization has debts that it cannot pay, the individual owners will not be held responsible for those debts. If the organization has to file bankruptcy the individual owners are still not personally responsible for any of the liabilities that the organization has.
  • Owners can choose to have profits distributed anyway they would like. This means, whatever percentage of profits they want to give to each member, they have the flexibility to do so.
  • Reduction in paperwork, tedious meetings and note-taking that are required by corporate entities are not required by an LLC. There are no board meetings or quarterly meetings required. There are no quarterly or semi-annual reports that are necessary for the IRS.
  • There is no double taxation. There is no need to pay taxes on corporate profits, as well as on profits that pass to members. You only pay taxes once, and that is on those profits that are given to individual members.

Disadvantages of Limited Liability Company

Following are the disadvantages of starting a Limited Liability Company:

  • Longevity of the company is based on the life of the members. The company will dissolve if a member goes bankrupt or passes away.
  •  This is not the best form of business to set up, if you are planning on distributing shares later to shareholders. It is not the best business entity to set up if you are planning on going public.
  • New challenges may be encountered, in terms of the way that the organization files taxes. The LLC can be designated as other kinds of business entities when it comes to completing tax returns, such as, a corporation, partnership or sole proprietorship. Of course selecting the sole proprietorship format would be the easiest to complete, but you may not have a choice. This status may be automatically selected for you. Check with your tax advisor to be sure.

Examples of Limited Liability Company

Some of the examples of Limited Liability Company are as follows:

  • Chrysler Group, LLC
  • Westinghouse Electric Company, LLC
  • Dougherty & Company, LLC

Read more about Advantages & Disadvantages of

i) Sole Proprietorship Business

ii) Partnership Firm

iii) Corporation.

 

PG

Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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