Limited liability company

In the United States, the limited liability company (LLC) is a relatively new business structure compared to the other business structures (it became popular at the beginning of this century). It is a hybrid between a general partnership and a corporation, and offers the best features of the both. A limited liability company is formed by the consent of its member-owners. The company must file articles of organization to the state in which it operates. The state authorizes the organization of the firm by issuing a charter. A limited liability company is viewed as a legal entity apart from its member-owners.

The advantages:

• There is great amount flexibility regarding the management of the firm.
• There are no corporate formalities that must be preserved, such as member meetings or an election of board of directors.
• The LLC is also preferred for its flexibility in taxation. An LLC has the option to be taxed only once as a partnership. Single taxation should save the firm a lot of money for growth and expansion.
• The members of a LLC enjoy limited liabilities for the firm's debts. If the firm cannot pay its bills for any reason, creditors cannot seize the personal assets of its members. Therefore, this form of organization gives its members greater security.
• There is also no joint liability for torts and breach of trust. A member is not liable for the torts committed by other members unless he or she has directly participated in the cause for action.
• If one of the parties decides to withdraw from the firm or dies, the LLC is still intact as an entity. Therefore, this structure is more stable than a partnership.

The disadvantages:

• The main disadvantage of an LLC is the lack of uniform laws across the states. If an LLC decides to expand to another location in a different state, the firm must review the laws of the state to ensure that the LLC complies with all the rules of the new state of operation.
• Since the LLC is a relatively new invention, some creditors may not be familiar with the business structure and might be less willing to give out loans to the company.
• There is the limitation in that people who would invest as shareholders are thrown by the term "membership", which is what they would have in the LLC rather than a "share".

Basically, there are few, if any, disadvantages to an LLC. The current disadvantages will be phased out as people and the business world become more familiar with the LLC.

Kurt: Thank you very much for the insights and good points.

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Back to Business Organizations.

While Limited Liability Companies have a significant degree of flexibility over a corporation, their very flexibility can result in great trouble for the business. In a corporation, you are required to jump through hoops and handle a variety of bureaucracy to insure that the business is treated as an entity completely independent of the owner. With an LLC, if you are not careful to respect the independent interests of the business and the owner(s), you may be subject to personal liability.

One case in point in relatively recent cases is an LLC sharing the name of the business owner. For example, John Smith forms John Smith, LLC. As is quite common, businesses often drop their suffix (in this case, LLC) while conducting their day-to-day business. Unfortunately, in the case of John Smith, LLC, it appears that John Smith, and not his business, is conducting the activity. In such a scenario the courts have determined that John Smith can in fact be held personally liable. Fortunately, an easy way to get around this problem is to have the LLC file a Certificate of Assumed Name to do business as John Smith in addition to John Smith, LLC.

While this is just a particular incident dealing with only a subset of all LLC’s, the general concept still applies. More generically, any time there is an intersection of the interests of the LLC and the owners, make sure the activity is well documented. Just because nobody is peering over your shoulder to ensure that all of the forms are filed, it does not mean that your obligations have somehow been waived.

Under UK commercial law, a long-established generic term more or less equivalent to "corporation" in the USA, including various types of joint stock company (another term which has different meanings on either side of the Atlantic):

• public limited companies (whose shares are traded publicly on a stock exchange)
• private limited companies (whose shares are not quoted on a stock exchange and do not have to be offered for public sale),
• private companies limited by guarantee (which have membership rather than share ownership, a form mainly used by charitable or similar organisations)
  
• Community Interest Companies which can take on any of the forms above but have the additional requirement of a primarily social purpose and have their assets protected from predatory takeover or exploitation for pure profit. 
• limited liability partnerships (which are more tightly regulated than other partnerships), mainly used by professionals such as lawyers who have traditionally not been permitted to incorporate their businesses.

In other words, the term covers all the types of commercial organization to which limited liability applies (with the possible exclusion of industrial and provident societies (cooperatives), which offer limited liability to their members but which are not governed by the Companies Act.