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Limited liability company

From Academic Kids

A Limited liability company (denoted by L.L.C. or LLC) is a type of legal entity which has only relatively recently been made possible to establish in the United States and many other, mainly anglophone, countries. An LLC is similar to a corporation and a limited liability partnership. A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC").

The concept of an LLC was apparently modelled after the German GmbH (Gesellschaft mit beschränkter Haftung; LLC is a broad translation of the term). These have existed in German-speaking countries for some time—in Germany itself since 1892. The concept was adopted by many English-speaking countries because LLCs have some advantages over corporations. It is sometimes said that an LLC is "kind of a 'light' version of an Inc. or Ltd." This is a generalisation, however, and may be misleading or wrong in some cases.

Basically, an LLC allows for the flexibility of a partnership structure within the framework of limited liability, such as that granted to corporations. Another advantage of an LLC over a limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations; because of the lack of requirement for annual meetings of shareholders (LLCs have "members") or bylaws, for instance - however, most LLCs will choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws.

The primary reason that most businesses choose to be organized as an LLC is to avoid "double taxation." A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), then those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.

Contents

LLC v. LLP

A limited liability company (LLC) differs from a limited liability partnership (LLP) in that the LLP has the organizational flexibility of a partnership and is taxed as such, and in that all partners of the LLP remain liable for the other partners' debts and obligations.

LLC vs. Inc. & Ltd.

Advantages of an LLC

  • No requirement of an annual general meeting for shareholders
  • Pass-through taxation (i.e. no double taxation).
  • Unlike Subchapter S Corporations, pass-through taxation applies even with entities (rather than individuals) as members, and the number of members is not limited.
  • Limited liability (meaning that the owners of the LLC, called "members," are protected from liabiliy for acts and debts of the LLC)
  • Profits taxed personally (at the member level, not at the LLC level).
  • Can be set up with just one natural person involved (in most states), contact your state's Secretary of State, local chamber of commerce or SBA office (www.sba.gov) to get more information.

Disadvantages of an LLC

  • It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual initial public offering.
  • The possible lack of any operating agreement requirement can cause problems
  • Short life span. Average life span of a LLC is 30 years because of death of one of the owners. In some cases this rule can be bypassed if there is a consensus among all the other members. (Most states now allow LLCs to have perpetual duration (like corporations) and LLCs are generally not dissolved as a result of the withdrawal of any one member).
  • The unsophisticated, such as new businessmen or low-level clerks, do not understand the LLC structure and often demand actions by Directors or by Shareholders or officers. While an LLC may establish something akin to a board of directors and can designate officers, it is not required to do so. Thus, a low level clerk's insistence on a signature of a President may require an LLC to appoint a President in order to get around the red tape.

In other languages

  • In Italy, a limited liability company is called a "Società a responsabilità limitata" or S.r.l.
  • In most German speaking countries, the closest thing to a limited liability company is a Gesellschaft mit beschränkter Haftung, often shorthanded as GmbH.

See also

External links

  • LLC History (http://www.llc-reporter.com/16.htm)
  • Nolo site on LLCs (http://www.nolo.com/lawcenter/ency/index.cfm/catID/19B45DBF-E85F-4A3D-950E3E07E32851A7#BAAE1B67-F54A-41B4-91943A51F56C3F79)

de:Gesellschaft mit beschränkter Haftung ja:LLC nl:Besloten vennootschap pl:Spółka z ograniczoną odpowiedzialnością it:Società a responsabilità limitata

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