Limited liability companies are popular choices for business start-ups and are more formal structures than partnerships and sole proprietorships. These are not limited liability, as against popular misconception. Forming a limited liability company is a lot easier than forming other business structures, as these are easily recognizable by the law. There are multifarious advantages and disadvantages when it comes to starting a limited liability company. A lot of people are drawn to the idea of starting a limited liability company because of the tax benefits that come with this sort of business structure. However, it is impossible to overlook the disadvantages that come hand-in-hand with this arrangement and all its advantages. Hence, if you are planning to start a limited liability company, it would be advisable to go through and comprehend the different pros and cons of limited liability companies before you take this route. Read on for some details.
Limited Liability Company
By starting a limited liability company, the owners are not personally liable to pay for the debts, loans or losses incurred by the company. In this case, the business structure aids in limiting the personal liability held by the owner. This is a primary ‘plus’ for limited liability companies. Should there be an event of drastic losses or liabilities and loans have to be repaid, it is entirely the responsibility of the business to own up and stand accountable for the discrepancies and losses faced. Another bonus, that comes along with this advantage, is that even if the company faces problems or should a lawsuit ever arise, the personal assets of the owner are well protected and cannot be used to pay for debts or loans.
In a partnership, the rule states that anywhere between 2 to 20 partners are allowed to start a business together while a sole proprietorship has only own owner in the eyes of the statute. However, there are no boundaries or constrictions when it comes to limited liability companies. These entities can have as many owners as possible who not only come with more ideas, opportunities and capital, but also with the advantage of lesser liabilities per person.
A limited liability company is a cross-breed between partnerships and rigid entities such as corporations. Although these structures have more ‘partnership’ characteristics, they also have vague outlines of a corporation. Limited liability companies function like corporations, on the basis of ‘stand-alone entities’. This means, that when there are lawsuits against a particular individual or there are disputes, then the rest of the company is not affected by the legal proceedings against another owner.
Limited liability structure can be easily adopted as compared to other business structures. If a business is running on a sole proprietorship label or a partnership structure and wants to convert into a limited liability company, then it is fairly easy and convenient to do so. All the business has to do is file for a ‘certificate of conversion’ in the respective state and make an announcement of ‘entity conversion’. As the structure is easily recognizable by law, the procedure does not require too much paper work or legal formalities.
With a limited liability company, the entity can avoid paying double taxes as corporations do while paying corporate tax or when paying dividends to shareholders and the like. In the case of limited liability companies, these can be totally avoided. As the entity also follows a partnership structure, according to law, limited liability companies can opt for tax treatments adopted by partnerships. Now, let’s be honest! This is one of the major reasons as to why many start-ups opt for a limited liability company structure.
One of the major disadvantages of limited liability companies is that there are specific taxes levied against individuals on the basis of profits, number of owners or revenue, though these typically vary from state to state. However, the members of the limited liability company are held responsible for something called ‘Self-employment’ taxes, which are unavoidable and which cover medical and social security payments.
Limited liability companies are fairly novel entities that are not very common unlike partnerships, corporations and sole proprietorships. Therefore, the laws regarding these entities are ever-evolving. Since these companies are hybrid structures, it becomes even more difficult to manage or govern these companies by law. The law also states that if the limited liability company mirrors the characteristics of a corporation, then the business is most likely going to find itself in a ‘soup’. Not more than two characteristics that make a corporation can be adopted by limited liability companies. If these rules are breached, the company can be shut down by the statutes.
In limited liability companies, investors and stakeholders may not be too interested to invest or do business. There is very limited scope in terms of attracting potential clients or investors because these companies do not have or follow the policy of public offerings unlike major corporations and private or public limited companies. Venture capitalists prefer investing with companies that show scope for growth, and since this policy is not followed by limited liability companies, the portals to opportunities are limited.
Not For All Professions
Not all companies can convert and form a limited liability company. There are certain professions and company types that are banned from converting to limited liability for legal reasons. Banking and insurance firms are such examples. According to the law, that governs the formation of these entities, a few tertiary sector businesses are not allowed to form limited liability companies. The rigidity in this case, proves to be a major disadvantage in this form of business structure.
Limited liability companies are flexible enterprises that are becoming increasingly popular. Recognized by the state statute, these business structures not only function as a two-way ‘sword’ but are easy to form. From tax efficiencies to evolving laws, these companies are becoming the focal point for many. All you have to do is, find out the exact rules of forming a limited liability company in your state and weigh the pros and cons before taking that next step. Good luck!