What is a Limited Liability Company?
A limited liability company (LLC) is a business structure that provides personal liability protection to business owners while reducing tax and business requirements. The profits and losses of the business are passed through to the owners, and each business owner is required to include a share of the profits/losses in their personal tax returns.
In the LLC, there is no limit to the number of shareholders. Depending on the rule and regulations of a country, when registering a limited liability company, the entity must file its articles of association with the respective authority where it intends to do business.
Features of a Limited Liability Company
- Formation of an LLP requires the filing of documents with authorities. In the case of the United States of America, the authority is the Secretary of State. In the United Republic of Tanzania, the authority is vested in the hands of the Business Registration and Licensing Authority (BRELA).
- An LLP, may have one or more owners called members.
- A Limited Liability Company can be member-managed, or manager-managed. The feature provides the flexibility of operations all the time.
- All members, managers, and employees of an LLC have limited liability status against the misdoing of other members, managers, and employees.
- Profits and losses flow through to the members according to the operating agreement, their capital accounts, or local law which is generally proportional to their contributions.
Advantages and Disadvantages of an LLP
It is worthwhile considering the advantages and disadvantages of operating a limited liability company before making your decision.
Advantages of operating an LLC
The following are some of the advantages of setting up a limited liability company.
- Separate Entity: An LLP is a body corporate distinct from its owners. Owners are not liable for obligations of the company.
- Limited Liability advantage: Employees, managers, and members of the LLP are not responsible for any misdoing each other in operating the company. Members are fully protected.
- Simplicity advantage: Limited liability Companies come with fewer requirements compared to a corporation. In addition, there is less paperwork involved.
- The owners enjoy limited liability, which protects their assets from being sold to pay liabilities of the entity.
- A limited liability company is not subject to any limitation on the number of shareholders.
- Members of an LLC have the flexibility of operating as a member-managed or manager-managed. However, most members opt to appoint a professional manager to manage the business.
- In the case of the death of a member, compared to a corporation, the existing members have the flexibility to either continue with the business, close the business or create a new company together.
Disadvantages of an LLC
- A limited liability company may or may not require legal formalities and an organized manner to run itself. Experience shows that not many would show a great interest in investing in the same as may seem expensive to set up.
- The entity may need to hire an Accountant and an attorney to ensure that it complies with tax and regulatory requirements.
- There is a security risk and lack of confidentiality in case of an LLC shuts down for merges with another corporate structure or decides to form a new one.