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A limited liability is a form of legal entity that integrates the best features of partnership and company structure agreements. It is highly flexible in terms of ownership, which offers limited liability to its owners. In this type of agreement, the members may include:
- Company
- Corporation
- Individuals
- Other limited liability companies also
It is highly applicable for small and medium companies with less number of owners.
Limited Liability Company set up
As a part of business structure of company formation, there are two main approaches to setting up a LLC like:
Articles of Organization
In order to set up a limited liability company, owner has to file articles of organization and to pay the required fees with the help of a lawyer or legal counsel
Operating Agreement
It is highly advisable to create an operating agreement, which is a legal binding agreement to define the management structure that includes
- Profit sharing
- Responsibilities
- Ownership changes
- Ownership structure
Limitations
There are few limitations in limited liability structure that includes:
- Mishandling of funds for his/her own personal use
- Directly and personally disappoints someone
- Not depositing taxes collected from the employee’s salary
- Knowingly involving in fraud and illegal activities that causes problem to the company
- Misusing the power of LLC for his/her own personal affairs
Advantages
- Very less administrative work and easy tracking of official records
- No double taxation issues
- Non- requirement of annual general meeting function
- Even one person can form LLC in certain countries
- Owners are taxed for their profits at the individual level rather than LLC level
- Flexibility in distribution of member profits
Disadvantages
- In LLC structure, it is very difficult to raise funds unlike in any company form
- In many parts of US, a franchise tax is levied on LLC’s for its privilege as limited liability
- No mandatory requirement of operating agreement
- Non- clarity in the management structure titles to determine who is responsible to support on behalf of LLC
- Its difficult to go for an IPO or public option
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