Before we get to discussing the various limited liability company advantages, let's first understand the complete essence of the various factors and aspects that comprise a business entity which is known as a Limited Liability Company (LLC). Advantages thereof can be best understood if we know the underlying principles and machinery of such a form of enterprise. A limited liability company is a pliant commercial structure that incorporates characteristics of both a formal corporate enterprise as well as a partnership or sole proprietorship enterprise.
It lacks the incorporated legal structure of a corporation and the most prominent feature that it has in common with a partnership firm is that it shares the latter's income tax liability structure which is available to flow-through entities (where income of the enterprise is regarded as the income of the investors and partners/owners of the enterprise; they are not considered separate from the business entity). Let's take a detailed look at some more facts about Limited liability companies before moving on to LLC advantages.
What is a Limited Liability Company?
The most prominent feature of a limited liability company lies in the flexibility of governance and administration that is allowed by such a setup. Keeping within the legal parameters of the land, be it of a particular State or the entire Country, a limited liability company can be governed any way the members want it to be governed. This the reason why the phrase unless otherwise provided for in the LLC operating agreement is ubiquitous in the statutory documents of almost all limited liability companies throughout the world.
In the United States, all State statutes have a provision for limited liability companies' governance which says that there exists a default clause with regards to how LLCs should be governed unless otherwise specified in the operating agreement. Similar to an incorporated corporation, a limited liability company follows the principle of limited financial liability of the investors. Such liability is limited to amount of share owned by any stakeholder and as such, such a holder cannot be asked to pay up more than the value of his holdings on the event of dissolution or any financial calamity.
Advantages of a Limited Liability Company
Most of the limited liability company advantages stem from its flexible governance structure couple with the limited liability clause. Following are the most prominent LLC advantages that give it a certain edge over other forms of commercial enterprises.
- Flexibility, the key feature of an LLC, is incorporated in the taxability of such an enterprise as well. A limited liability company can opt to be taxed as a sole proprietorship, a partnership, an S corporation or a C corporation.
- Limited liability means that the members are responsible only for the value of interest or stock held by them in the company.
- Unless a limited liability company chooses to be taxed as a C corporation, there is no separate tax on the company's earnings and the investors earnings from the company as both earnings are regarded as the same. Earnings in the form of profits are taxed on members once they receive such income, ruling out double taxing.
- Certain States permit the setting up of a limited liability company with just one member, who must be a natural person as defined by law.
- Limited liability companies are less susceptible to fall victims to fire-sale acquisitions and other similar corporate malpractices.
Every coin has two faces and the very features that spell benefit for a limited liability company may become its nemesis under adverse or mismanaged conditions. One of the chief disadvantages of a limited liability company is its lack of compulsion for a stringent operating agreement. In absence of proper operating agreements and standard statutory guidelines, the enterprise is prone to run into problems every now and then if the members themselves do not undertake to establish foolproof governance methods and make strict adherence mandatory. Also, too much of flexibility may not ring well with third parties and prospective investors and this could make raising capital a little difficult.
That was a precise overview of the various limited liability company advantages and disadvantages, preceded by an explanation of LLC. No commercial enterprise structure is free from its typical structural weaknesses, irrespective of the number of advantages it boasts of. Same is true in case of LLCs and advantages of LLC. It all depends upon the type and scale of business and the legal jurisdiction within which the business operates. Based on these and many other macro and micro factors, a business should decide what form or structure to follow to enjoy greater profitability at the least financial, legal and social cost.