Limited Liability Company has become increasingly popular because of its benefits. As a legal framework, this business type shields the business owners and its investor from personal financial responsibilities. This article will explain a further definition of Limited Liability, how it works, the types of LLCs, and the advantages of it.
What is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a business structure most commonly found in the United States. It merges the characteristics of a corporation with those of a partnership or sole proprietorship. This hybrid structure offers owners limited liability protection in case of the failure of the business.
Despite LLCs having the same limited liability protection as corporations, they differ in their taxation structure. Unlike corporations, LLCs provide “flow-through taxation”, a feature commonly associated with partnerships.
“Flow-through taxation” or “pass-through taxation” means that the profits and losses of the LLC are distributed to its members and taxed on their individual tax returns, in contrast to corporations that are taxed separately from their owners.
In a nutshell, LLCs offer the same level of limited liability protection as corporations while allowing their members to enjoy the tax flexibility of a partnership.
How does Limited Liability Company Works?
When the company type is a limited liability, the owner’s and the investor’s personal assets are protected. They cannot be used to pay off the company’s debt or other obligations.
It excludes the funds invested in the company, such as company stock, that are considered company assets. It can be seized in case of unforeseen business failures, such as bankruptcy or lawsuits.
Due to this reason, LLCs are favorable for owners and many investors. Their liability is only the amount invested in the business, and their personal assets are protected.
To name a few, here are some examples of LLCs: Tesla, Inc. (American electric vehicle company), Airbnb, Inc. (An online marketplace for accommodations, rentals, etc.), and Uber Technologies, Inc. (A transportation service for food delivery and ride services).
Also read: 12 Pro Tips for Choosing Your Company Name
What are the Characteristics of a Limited Liability Company?
There are some of Limited Liability Company or LLC characteristics:
- LLCs are authorized by state statutes. The rules and regulations that govern them differ from state to state.
- LLCs are formal business entities that require the submission of articles of organization to the state in order to be established.
- In contrast to corporations, LLCs are easier to establish and offer greater flexibility and protection for investors.
- Unlike other business structures, LLCs are not taxed on their profits directly. Instead, the profits and losses are distributed to members, who report them on their individual tax returns.
- There are several types of LLC: limited liability partnerships (LLPs), limited liability companies (LLCs), and corporations. They also exist in smaller-size including proprietorship LLCs, family LLCs, and member-managed LLCs.
Advantages and Disadvantages of Limited Liability Company in Indonesia
Under Indonesian law, Limited Liability companies, or Perseroan Terbatas, are established and operated based on Law Number 40 of 2007, Article 1. This law defines a Limited Liability Company as a legal entity that operates with capital and is created through an agreement.
This type of company conducts business using authorized capital divided into shares and meets the criteria and conditions specified in the law and its related regulations.
Additionally, LLC owners and investors do not have personal responsibility for the losses of the business. Instead, their liability is limited to the capital they have invested in the company.
Here are some benefits of LLCs:
- The liability of the shareholders is limited to the invested capital in the business.
- Pass-through taxation enables all profits to flow through to the owners. They can be taxed as personal income, and it avoids double taxation.
- Guaranteed company sustainability
- Convenient access to obtain capital from other parties.
- The easier process to transfer the ownership of the company
Along with the advantages, it also comes with drawbacks:
- The process of establishing the company can be quite complicated as it involves obtaining a notarial deed and getting legal entity approval from the Ministry of Law and Human Rights.
- Relatively higher tax liability
- The company’s dependency on the shareholders and its invested capital
- In some states, an LLC may be required to dissolve when a member goes bankrupt or passes away.
How to Set Up a Limited Liability Company
The procedure or requirements to establish a limited liability company may differ from each state. However, here are some of the common steps you have to follow to set up LLCs:
- Register the name of the company.
- Fill and submit the articles of organization and other required documents. The articles of association show the company rules created and approved by the owners. The information included the name of the company, the address, the name of the registered agent, and the statement of business purpose.
- Pay for the registration. To proceed with the application, pay the fee and other additional charges to acquire the employee Id number.
FAQ about Limited Liability Company
After knowing about the meaning of LLC, it’s characteristics, and the advantages, here are some frequently asked question about LLC:
Is a limited liability company legal?
Yes, Limited Liability companies are a legal business structure. This business entity legally protects the personal assets of its investors and owners. It limits their financial liability to financial loss that can happen to the capital invested in the business.
What is the difference between a limited liability company and a private company?
To put it simply, an LLC is a hybrid business model that combines aspects of both corporations and partnerships. Meanwhile, a private limited company, commonly identified by the name “Limited” or “Ltd”, is considered a popular type of business entity.
Is a limited liability company the same as Ltd?
For the most part LLC and Ltd are almost identical, yet there are slight dissimilarities between both terms. Both fall under state legal regulation. The difference is that Ltds have tax liabilities, whereas LLCs do not.
What is the difference between a limited liability company and unlimited liability company?
The main distinction is that limited liability companies shield business partners from financial risks such as debts or other legal obligations beyond their invested capital in the company. In contrast, unlimited liability companies make the owners inseparable and completely accountable for the business obligations and debts.
Now you know about LLC meaning and definition, characteristics, how it work, advantages and disadvantages, and how to set up one. In conclusion, establishing a limited liability company can be an excellent choice for your future goal. The advantage of LLC is offering the business owners and investors personal financial liabilities beyond their investment to the company.
You can also choose one of the LLC types that best suit your business structure and aspirations. Hopefully, we give you an idea about what is an LLC and how does it work and help you to decide the business type you are looking for.