Limited Liability Company (LLC)
Limited Liability Company is another category of company registered under the Indian New Companies Act, 2013. There are number of companies available in India including private limited and public limited ones but Limited Liability Company is a brand new one in the line. It’s often called as a Limited Liability Corporation and its nature of business is quite similar with partnership firm and sole trade business. Company is an association of persons or an artificial person formed under the Indian Companies act in order to carry out a certain business. Under the Limited Liability Company Act, liability is limited among members or partners.
New Companies Act, 2013 has defined all rules and regulations regarding incorporating and registering all limited liability companies. One should apply to the Registrar of Companies (ROC) by giving all the details regarding company including name of the company, name and address of board of directors, location of the company as per the company registration services.
A private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested. A Limited Liability Company, also known as an LLC, is a type of business structure that combines traits of both a sole-proprietorship and a company. An LLC is eligible for the pass-through taxation feature of a partnership or sole proprietorship, while at the same time limiting the liability of the owners, similar to a company. As the LLC is not considered a separate entity, the company does not pay taxes or take on losses. Instead, this is done by the owners as they have to report the business profits, or losses, on their personal income tax returns. However, just like company, members of an LLC are protected from personal liabilities, thus the name Limited Liability.
A limited liability company is an U.S. form of privately owned company that combines the limited liability of a company with the simplified taxation of a sole proprietorship or partnership. Owners of a limited liability company, referred to as an ―LLC,‖ report the company‘s profits and losses on their personal income tax returns, rather than preparing separate corporate tax returns. This is known as ―pass-through taxation.‖ LLC owners are referred to as ―members,‖ and the company may be owned by a single individual, two or more individuals, or by a company or another LLC.
Features
1. Limited liability: As the name implies, members‘ liabilities for the debts and obligations of the LLC are limited to their own investment.
2. Pass-through taxation:Â For taxation purposes, income from your business can be treated as your own personal income, and is therefore not subject to certain corporate taxes for which companies are liable.
3. Separate Legal Entity:Â A LLP is a legal entity and a juristic person established under the Act. Therefore, a LLP has wide legal capacity and can own property and also incur debts. However, the Partners of a LLP have no liability to the creditors of a LLP for the debts of the LLP.
4. Uninterrupted Existence:Â A LLP has ‘perpetual succession’, that is continued or uninterrupted existence until it is legally dissolved. A LLP being a separate legal person, is unaffected by the death or other departure of any Partner. Hence, a LLP continues to be in existence irrespective of the changes in ownership.
5. Audit not Required:Â A LLP does not require audit if it has less than Rs. 40 lakhs of turnover and less than Rs.25 lakhs of capital contribution. Therefore, LLPs are ideal for startups and small businesses that are just starting their operations and want to have minimal regulatory compliance related formalities.
6. Easy Transferability:Â The ownership of a LLP can be easily transferred to another person by inducting them as a Partner of the LLP. LLP is a separate legal entity separate from its Partners, so by changing the Partners, the ownership of the LLP can be changed.
7. Owning Property:Â A LLP being an artificial judicial person, can acquire, own, enjoy and sell, property in its name. No Partner can make any claim upon the property of the LLP – so long as the LLP is a going concern.
Advantages
1. Limited liability: As the name implies, members‘ liabilities for the debts and obligations of the LLC are limited to their own investment.
2. Pass-through taxation:Â For taxation purposes, income from your business can be treated as your own personal income, and is therefore not subject to certain corporate taxes for which companies are liable.
3. Limitless ownership:Â Some legal structures limit the number of people allowed to file as owners. With an LLC, there is no limit to the number of owners. An LLC can have one member or hundreds of members.
4. Allocation flexibility: In an LLC, the amount of money that owners invest into the business doesn‘t need to equal their percentage of ownership. When an LLC is formed, members create an operating agreement, in which different percentages of company profits and losses can be assigned to owners regardless of the amounts of their initial investments.
5. Freedom in management:Â Unlike standard companies, LLCs are not required to have a board of directors, annual meetings, or strict book requirements. This can free up a lot of time and stress to let you run your business on your own terms. As you can imagine, this can be an important advantage of a limited liability company as well.
Disadvantages
1. Building capital:Â Unlike companies, which can issue stock in order to increase funds for their companies, LLCs have to work a little harder to find investors and sources of capital due to the greater legal obligations to add a new member to an LLC. If you have a fast growth internet company that needs venture capital to scale, this limitation is one of the major disadvantages of a limited liability company.
2. Higher fees:Â LLCs must typically pay more fees to file as LLCs compared to some other business entities or sole proprietorships.
3. Government regulation:Â Because of the protections afforded to LLCs, some types of businesses are ineligible to file as LLCs. Banks, insurance companies, and medical service companies are examples of businesses that may be barred from filing.
4. Lack of case law:Â The LLC business form is a relatively new concept. As a result, not a lot of cases have been decided surrounding LLCs. Case law is important because of predictability. If you know a court has ruled a certain way, you can act accordingly to protect yourself.
5. Confusion About Roles: Whereas corporations have specific roles (like directors, managers, and employees), LLCs generally do not. This can make it difficult for the company and especially investors to know who‘s in charge, who can sign certain contracts, etc. Some of this confusion can be avoided by creating an LLC Operating Agreement.
6. Limited Life:Â In many jurisdictions, if a member departs the LLC, the LLC ceases to exist. This is unlike a corporation whose identity is unaffected by the comings and goings of shareholders. Members of LLCs can combat this weakness in the Operating Agreement.