Limited Liability Company (LLC) Definition
A Limited Liability Company (LLC) in plain terms, means a legally registered business entity which is limited by shares. Limited liability implies that all the shareholders are accountable for all debts which the company incurs. The liability of the business partner is limited to the amount of money which they've invested in the company.
In most cases, an LLC is formed where two or more business individuals come together and form a partnership. That is to say, they get to run the business as co-owners.
How to create an LLC (Limited Liability Company)
The steps are straightforward and unchallenging. Keep in mind that stakeholder consultations are paramount while doing the entire registration process.
Choose a Business Name
First and foremost, you need to do a name search. The reason is that the name of your LLC shouldn't be similar to that of an existing company. It's prudent to use a name which is simple and unique.
And not only that.
Use a name which gives a clue of what your business does. One more thing to note is that your business name should end with an ‘LLC' descriptor. Here's an illustration. The name must end with an acronym which suggests that the business is a Limited Liability Company. Alternatively, it can end with the name ‘Limited Company' or you can include phrases such as ‘L.L.C', ‘Liability Co.', or ‘Ltd'.
You ought to be meticulous with the name to avoid words which are restricted by the law. In fact, most jurisdictions do not allow the following;
- Using descriptors such as ‘Incorporated', ‘Inc' or even ‘LLC' whereas, in actual sense, the business is not incorporated or registered as an LLC.
- Most jurisdictions restrict businesses from using names which suggest that the company is a government entity. Also, words such as Bank, City, and Insurance are prohibited by laws from various territories.
- If my business doesn't have the requisite licenses, I'm barred from using names which imply that I'm recognized as a professional. Examples include ‘Doctor', ‘Barrister', ‘Engineer'.
- I'm not allowed to use words such as ‘Bank' or ‘Insurance' of the appropriate government agency hasn't legally approved me to run my business using such a name.
- It's against the law to use a name which deceives the customers. One which gives the wrong description of my services.
Filing the Articles of Organization
This comes after choosing the most suitable Company name. Articles of Organization are more or less the same as Articles of association. What follows is the payment of a filing fee to the relevant authorities in your state. Articles of Organization bear all the important information about the LLC. This includes the company's physical address, its name, and the filing agency.
I must use a registered agent. The name and address of the registered agent must appear on the Articles of Organization. There ought to be a brief explanation of the kind of products or services which the LLC intends to deal in. It must be captured together with the specific date which the Company wishes to start off its operations.
Draft an LLC Operating Agreement
This legal document creates the parameters which will govern the LLC. It works to meet the needs similar to those of Articles of Incorporation which govern a Corporation. In other words, it lays out the rights and obligations of each business partner. Hence, it's a meeting of the minds which means, it's drafted in the presence of each member.
On the other hand, the contents in an operating agreement may vary depending on several considerations. More often than not, the document contains the following information;
- Amount invested by each member in the LLC
- How the profits will be split among the investors
- Organizational structure in terms of power, roles, and responsibilities
- The number of members
- Tax considerations
And why is the agreement an essential component?
A written agreement helps to resolve any future outcomes. In the event of a dispute between the members, this acts as a reference document in the mediation process. It may include an Arbitration clause in the event of a dispute. An operating agreement preserves the housekeeping rules which elaborate how the business should be run by the business partners.
Aside from that, it sets out the procedure on how to add new members or raise more funds among the existing investors in the LLC. Most importantly, it describes the liabilities of each partner.
It's worth noting that Limited Liability Company can be formed by a sole proprietor or several members. By virtue of this, an operating agreement for a single member tends to be less detailed. This trickles down to paying taxes where they get to file all tax returns as sole proprietors. Quite divergent from a multi-member LLC which pays the taxes as a partnership.
As a further matter, the members can choose to handle all operations by themselves or appoint managers who will run the business on their behalf. In contrast, a shareholder is allowed to be a director in a corporation.
Obtain all the necessary licenses
All requisite permits are part and parcel of setting up a Limited Liability Company. One must make tax registration if at all the LLC intends to get involved in any form of a commercial transaction or working with employees. It's important to know when exactly the taxes should be paid to avoid heavy penalties due to late payments.
In the UK, the registration process is done at the government's Company house. Some states in the US require one to obtain a business license for the LLC.
Limited Liability Companies Vs Corporations
It's cardinal to draw a distinction between the two.
What comes before setting a business, is exploring both entities to understand which one will suit my needs. First, you ought to know that a Limited Liability Company doesn't incorporate. In an LLC, the formation needs one or more business partners known as members who set up an operating agreement and file Articles of organization. Here, the profits and losses and split among the members depending on their share capital.
In contrast, a corporation is formed by filing a memorandum and articles of association. This includes the names of all shareholders, directors, and company secretary. A corporation is a separate legal entity which means that the liability does not pass to its shareholders unlike in an LLC. A corporation is a juridical person capable of paying its own debts.
Benefits of an LLC
- It has limited personal liability. If I'm a sole proprietor, this means that I'm personally responsible for all debts incurred by the business. A limited liability company takes the edge in the sense that it controls the personal liability on grounds that it's a separate legal body. An LLC has the capacity to pay for its own debts and obligations. Remember, this is subject to the shares each member invests in. My personal assets are not used to set off any liabilities.
- It's suitable for small businesses since it requires less documentation. An LLC doesn't have to keep sophisticated annual reports. A Corporation can have limited liability, however, setting it up needs more stringent requirements. There are so many meetings held by shareholders. It's more demanding than an LLC. Furthermore, an LLC is not mandated by law to hold meetings or keeps records of all minutes.
- In an LLC, members have a leeway to choose their own profit sharing method. This doesn't have to be according to how much shares each one contributed.
- A limited liability company has an upper-hand when it comes to taxes. ‘Pass-through' taxation applies in LLCs meaning that all incomes, profits, and expenses go straight to the owners' tax returns. The owner will then pay a personal tax return based on their profits.
- LLCs have an open-ended way to run daily activities. They don't have to follow formal structures such as those in Corporations where a board of directors is appointed to manage the Company.
Drawbacks of an LLC
- A limited liability company doesn't have perpetuity. If the members die, then it ceases to exist. A bankruptcy petition will be filed against the LLC
- LLCs can't issue an IPO. This means they can't go public since they're no shares to be subscribed. The employees in an LLC are also restricted from buying shares via stocks option.
- If we compare an LLC to a sole proprietorship, it appears to be more expensive to operate.
Dissolution of an LLC?
There are lots of dynamics which may result in dissolving an LLC. Among them include;
- Differences of opinion among its members
- Poor management
- Lack of working capital
So how is an LLC dissolved?
First, the plan to dissolve an LLC has to unanimously come from all the members. A certificate of dissolution must be obtained from the legal authorities and all licenses or permits need to be canceled.
All tax authorities need to be informed via proper documentation. If there are pending employees' salaries, they ought to be cleared to avoid any future claims.
All creditors must be privy to the dissolution process. The contents of the notice must include a formal email address which the creditors can use to send their claims. You must include the deadline date to file the claim and explain that if the deadline lapses, any claim won't be allowed. If a valid claim is raised, then members should settle by making full repayments.
The remaining assets should be distributed according to the share contribution from the members. Finally, the articles of dissolution need to be filed to the appropriate state authorities. This explains the official date of the dissolution and reasons for dissolving the LLC.