What is Limited Liability Company? Its Advantages and Disadvantages

Limited Liability Company (LLC):

The Limited Liability Company (LLC) is one of the business structures. It incorporates the advantages of sole proprietorship, partnership and corporation business structures respectively.

Please read on the Concept of Business Structure and Sole Proprietorship here.

The LLC can be formed by an individual or a group of people who have reached legal agreement on the general management of the business. Those forming the LLC are referred to as members; and one reason why they go into this business structure is based on the fact that each of the members' asset becomes protected when the business (LLC) is sued. For this reason, the risk of each member losing an important asset (for instance, a mansion) is annulled.

Please read on Partnerships here.

Note: A limited liability company (LLC) comprising of only one member is termed a single-member limited liability company (single-member LLC) while an LLC comprising of more than one member is termed a multi-member LLC.

A limited liability company can choose its preferred way of paying income tax; but typically, the tax paid applies to each member of the LLC and not the entity itself.

Rather than pay income tax, each LLC member pays their normal tax in addition to the tax derived from their respective profit from the LLC. To achieve this, each member will need to list their business profits and losses on their personal tax returns.

You can read on Scale of Preference and Opportunity Cost here.

Advantages of Limited Liability Company

1. The members of an LLC are not personally responsible for the LLC's debts; thus protecting their assets in the process of a lawsuit.
2. The LLC's profits are only taxed once since each member pay directly alongside their tax. This process of of being taxed once is known as pass-through taxation.

3. There is a limited liability (limited financial burden) on the part of the investor since it's limited to each person's investment.
4. There is freedom in management as there is no need for Board of Directors (BoD) and frequent meetings.
5. Loans can be easily accessible in an LLC.
6. There is no limit to the number of individuals involved in an LLC.
7. Compared to corporation, the LLC is quite simple to establish. A single member can even form an LLC.
8. As a business structure, the LLC is more credible than the sole proprietorship and partnership. For this reason, it is recognized as a more formal business structure.

Disdvantages of Limited Liability Company

1. It can be capital intensive.
2. Tax fee may be higher.
3. Depending on the country, there may be strict government laws guiding the LLC.
4. Cheques made into a limited liability company cannot be cashed directly.
   Please read more on the Concept of Cheques here.

5. The members of an LLC must have separate records for their LLC business and other businesses which they run alongside the LLC. In short, money generated from other businesses must be kept separate from the LLC account.
6. The members of an LLC must wait until they receive the schedule K-1 form in order to complete their personal taxes.