Limited Liability Company: Profit and Loss
Puja Bhardwaj | The CEO Magazine
The limited liability company is based on great flexibility and it requires less paperwork. This business entity provides limited liability protection features of a corporation and the tax efficiency and operational flexibility of a partnership. In this kind of company, owners are not taxed as a separate business entity but, all profits and losses are distributed among each member. The members of the company report profits and losses on their personal federal tax returns. And, the owners of an LLC have no personal liability for the obligations of the LLC. It is the perfect choice for people who are looking to flow through losses to its investors because an LLC offers complete liability protection to all its members.
Though, LLCs includes a lot of advantages, all of them cannot be described into a single article. These are some important benefits of starting business as a Limited Liability Company:
Limited Liability: Limited Liability Company offers protection for the owner against a possible lawsuit. The owner is considered a separate entity from the company. Here, creditors do not have the right to seize the owner’s personal assets or property to satisfy a judgment against his business.
Flexible management: The flexible management structure makes LLCs best option to initiate and perfect to run. There is no need for a team to keep the organization running; Limited Liability Company can be managed by the owners or by managers.
Taxation: The tax rate varies as per the income of the owner. At higher levels of net income, it is possible that the company is paying taxes at a lower tax rate than a corporation.
Profit Distribution: In a Limited Liability Company, there is the freedom of selecting any form of profit distribution. It is not compulsory that it will be in the ratio of the ownership between different members.
No Legal Formalities: It is one of the best parts about LLCs that they do not have a legal requirement to conduct formal meetings, maintain minutes of the meeting, or record resolutions like One Person Company.
While LLCs comprise multifarious positive points and they bring profits for most businesses. But there are certain factors of an LLC can prove to be disadvantageous. Some of the disadvantages of an LLC are:
Complexities in Formation: It is a fact that the paperwork and also the complexities related to LLCs are less than those needed for forming a corporation. But its formation is still substantially tougher than a partnership or sole-proprietorship.
Raising Money: In Limited Liability Companies, there are the lack of a strict corporate structure and taxation system. It creates doubts in investors, and they get hesitated in investing their money into an LLC.
Ownership Transfer: Apart from all the positive and negative point, one of the important points about a limited liability company is that here, it is harder to transfer ownership than a corporation.
Confusion about Roles: Unlike other corporations, where everyone has a specific role such as director or manager or employees, Limited Liability Company does not have. It makes it tricky for the company and especially investors to know the actual head to lead the company and sign certain contracts, etc.
The above points that show one side LLCs presents a great combination of flexibility and protection, another side; they shield members from personal liability, while affording them an array of tax options. So the topic can be concluded with this final statement- this type of business is right for you or not, it can be decided according to your desire, goal, backup and other essential factors.
Read about the Private Limited Company.