Table of Contents
- What is an LLC (limited liability company)?
- Types of limited liability company
- Based on the method of issuing and transferring shares and publicity
- Based on the number of members
- Non-profit LLC
- Professional Limited Liability Company
- Series limited liability company
- Two types of limited liability company in Nigeria
- Characteristics of Limited Liability Company
- Advantages (LLC Benefits)
- Disadvantages of Limited Liability Company
- How to form an LLC
- Choose a state where you want to form your LLC
- Choose a registered agent
- Prepare an LLC Operating Agreement
- File Your LLC with Your State
- Obtain an employer identification number (EIN)
- Open a Business Bank Account
- If necessary, the company should register to do business in other states
- Dissolution of an LLC
- LLC Vs LTD
- Limited Liability Companies Vs Corporations
- Limited liability company Laws
- Unlimited liability company
What is an LLC (limited liability company)?
A limited liability company (LLC) is a business formation that offers limited liability protection and pass-through taxation. Like corporations, it has a separate legal entity from its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. In other words, it is a company where the owners do not have to pay for the company’s liabilities and debts.
The LLC allows for pass-through taxation, as the tax system does not tax the company’s income at an entity level. The LLC’s tax return has to be completed if the company has more than one owner.
A limited liability company is not a corporation, it falls within the category of hybrid entities. The meaning of this is that it has both the characteristics of corporations and sole proprietorships. It provides the advantages of limited responsibilities just like corporations, and single taxes like the sole proprietorship and the partnership.
The members of the company are still the owners of the company. They look like partners in a partnership or shareholders in a corporation depending on how they manage the company. A member will look more closely like shareholders if the LLC utilizes managers. This is because the members will not participate in management. If the company does not utilize managers, then the members will closely look like partners. This is because they will have a direct say in the company’s decision-making. We represent a member’s ownership by his interest in the membership just the way partners have interest in a partnership business and shareholders have stock in a corporation.
The members (owners) of a limited liability company may be the managers or select some managers to manage it. Every member has an equal say in the decision-making process of the company. The members may choose to elect a manager or managers to act in that capacity. This is similar to the board of directors in a corporation. The managers are the ones in charge of the affairs of the LLC.
Types of limited liability company
a) Private limited liability company (LTD)
The number of owners in a private LLC ranges from two to fifty who bear the business risks jointly. The company is a separate legal entity from the law, the law recognizes it as a personality. In an event of business failure, the amount each owner loses is limited to the value of shares they contribute or invest in the business. There exists continuity in the operations of the business. If a member withdraws or dies, it may not affect the company’s existence.
The members raise capital through the issue of shares. However, they do not sell these shares to the general public. They sell them privately. They can also raise capital through borrowing from financial institutions and also through the issuing of debentures. Shares are not easily transferrable. They cannot resell shares to other persons, they can only do that with the consent of other members, or the management of the company.
The business usually does not make its accounts public though, in some states, the companies may publicize their accounts. To some extent, they keep the affairs of their business private.
The private limited liability company has the following advantages;
The restriction that is on the sale or transfer of shares may have both advantages and disadvantages based on one’s point of view. It is advantageous to some shareholders because shareholders that wish to sell shares cannot sell them to the general public or outsiders. The sale or transfer of shares has to be with the mutual consent of other shareholders. This however lowers the risk of hostile takeovers. Why the restriction on the sale of shares is a disadvantage is a fact that shareholders have limited options for liquidating shares.
Another advantage of a private limited company is it has a guarantee for a continuous existence, even after the owner dies or leaves the business. Private LLCs are incorporated. When a company undergoes incorporation, it becomes an independent legal entity. This means that the company is able to sue or own assets separate from its owner. A private limited company is different from a sole proprietorship because a single individual owns a sole proprietorship who is personally responsible for the company’s business debts and liabilities. Taking responsibility for these liabilities is essential to its continued existence.
These limited liability companies also enjoy tax advantages. For example, their corporate taxes may be lower than those the taxes other businesses pay. Private LLCs must file their financial statements not later than nine months after the fiscal year ends. When pursuing tax advantages, private LLCs must keep accurate accounting records.
b) Public limited liability company (PLC)
The public limited liability company is different from the government or state-owned enterprises. Like the private LLC, private individuals and organizations own the public LLC. It is different from the private LLC because the company can raise its capital through the issuing of shares publicly. That means members of the public are free to buy shares in the business when the company advertises it for sale. By implication, shares are easily transferrable. Any member of the company is free to resell his shares to another person anytime he wishes. This is because the shares here are quoted on the basis of the stock exchange and this increases their marketability.
The number of members or shareholders in the public LLC ranges from seven to infinity. There is a guarantee for the continuity of the company as the death or withdrawal of a member may not affect the existence of the company.
Based on the number of members
a) Single-member limited liability company
A single-member limited liability company comprises only one member just as the name implies. Though, the law does not treat single-member LLC as a separate legal entity. The income of this company income has to go through the tax return of its member for taxes.
It is similar to a sole proprietorship because the owner is personally responsible for company transactions, taxes, and debts of the business.
For example, APPLE started as a single-member LLC when Steve Jobs created the computer in his parents’ garage.
If a single-member LLC chooses not to become a corporation, they classify it as a “disregarded entity” and tax it as a sole proprietorship. Single-member is the most popular filing type and it is the most affordable limited liability company formation. It requires less paperwork.
b) Multi-member limited liability company
Multi-member LLC comprises more than one member. The law treats multi-member LLC as a separate legal entity, unlike the single-member LLC. Because of this, they are able to enjoy the advantages of corporations and partnerships.
For example, Facebook and Microsoft are the world’s leading technology companies, and they started as multi-member LLC.
As the name implies, the operations of such companies are not directed towards profit-making. They can therefore enjoy the no-tax benefits like churches and they can have limited liability as well as flexibility like partnerships and corporations. Some countries/states do not allow the formation of non-profit LLC.
Professional Limited Liability Company
People that have professional licenses such as the doctor, engineer, architect, or lawyer can create a professional limited liability company. The aim of creating a professional LLC is to provide medical, legal, and other services.
Examples of famous LLCs include IBM, Sony, Pepsi-Cola, Nike, Blackberry, and eBay are some of the famous LLC in the world.
Series limited liability company
A Series LLC is a type of company that is available in certain states. They are business entities that designate debts, obligations, and rights to smaller cells, which refer to series. This can include members, managers, assets, and interests.
Using this form of LLC will help the owners boost their limited liability protections. It can be a good method for protecting important assets in business. With this, they will designate the assets of your main LLC to smaller companies, known as series. The liabilities of one’s series company will not affect the main LLC. The owners operate every series company independently from their primary company.
If one decides to use the Series LLC entity, he will need to decide to incorporate his business. Certain states like New York and California, have certain laws that tend to be unfavorable to such a company.
Two types of limited liability company in Nigeria
In a limited company by share, the liability of members does not go beyond the amounts they contributed to establish and manage the Company. If the company runs into liquidation, shareholders lose their nominal shareholding only. They do not lose their personal assets to meeting up with financial obligations.
Limited companies by guarantee
Companies that are limited by guarantee are formed not for profit but to promote science, art, and religion. The liability of the shareholders is limited to their promise or guarantee.
Characteristics of Limited Liability Company
Separate Legal Entity
The business is a separate legal entity, the law recognizes it as a personality. In the eyes of the law, it is different from the owners. The company can sue and be sued in its own name without involving the individual owners. Because an LLC is a separate legal entity from its owners, it can run its business operations and carry on even if all the members have withdrawn from it. It would then recruit and hire new people, buy and sell assets, and other stock of the company. If there is any case of misconduct, LLC can defend itself in a court of law.
Protect Limited Liability
This company has limited liability for its members. If the company finds itself in any form of litigation or is guilty of bankruptcy, then the members do not have to pay from their personal income and assets. Its members will not be personally responsible for the actions of the company. Banks and creditors cannot accuse the company’s members of any default and come after them.
The members of the limited liability company will be liable and have to take responsibility for the misconduct and wrongdoings of members. It is not like a partnership business, where every partner is responsible for his own actions.
The features of an LLC possess the advantages of a corporation. One of the things that do not go well with a corporation is taxation. This is because they have to pay double taxes. The internal revenue service (IRS) does not have a specific provision for the LLC, whether to tax like corporation or partnership.
Any company that is planning to tax like a partnership will have to pass the taxes through the personal tax return of its members. That is how it would be able to avoid double taxes because an LLC does not pay income taxes.
Operation & Management Flexibility
In the functionality of corporations, there are lots of formalities involved such as an annual board meeting, shareholders meetings, and other meetings where corporations are legally bound to record every minute of their meetings.
The functionality of LLC is much more flexible, simpler, and easier where it does not have to conduct meetings and record every minute of it. Also, the management of record and other operations are much simpler than that of the corporation. Also, the members’ functions and positions are flexible in the course of their casual daily activities. It is therefore important to get familiar with the LLC laws of the country before setting up an LLC.
Because it is a separate legal entity, the withdrawal or death of a member will not necessarily affect the existence of the company. Even if all the members/owners decide to withdraw, the company can recruit new people.
Advantages (LLC Benefits)
A limited liability company has an option of taxation. They can choose whether they want to be taxed like a partnership or corporation. Also, they can go for single taxes or double taxes depending on their choice. Most times, LLCs prefer single taxes.
LLC doesn’t have a restriction on the number of its members depending on its type. They can have as many members as they wish. They also have flexibility when it comes to the membership style like trusts, estate, organization, etc.
The management of an LLC also possesses flexibility when it comes to choosing the management style whatever they choose. Like corporations, they do not need to follow the pre-decided set of rules. Members can either manage the company or elect a management group to do so. On the other hand, it is the board of directors that manage corporations, not the shareholders.
The management styles of LLCs are usually flexible, they involve fewer formalities. It is usually not necessary or mandatory for them to observe for them to conduct monthly/annual meetings, prepare periodical reports, call shareholders for meetings, or record and/or document everything.
Safe Personal Asset
In the case of bankruptcy, the personal assets of the members are safe from any form of liability unlike that of the sole proprietorship and partnership. We can say that the members of LLCs enjoy shields and protection from personal liability. Creditors or claimants cannot pursue the personal assets of the owners of the company to pay business debts. On the other hand, creditors can pursue the personal assets of sole proprietors and general partners against the debts of the business.
Starting an LLC may help a new business establish or gain reputation more than sole proprietorship or partnership. They possess more influence and trust.
Limited compliance requirements
Limited liability companies encounter fewer compliance requirements and ongoing formalities that the state imposes than sole proprietorships, general partnerships, or corporations.
Disadvantages of Limited Liability Company
Even though a limited liability company has a lot of tax and liability benefits, it is very difficult to raise capital for the company. Most times, people prefer to invest their capital in corporations because they see LLC as a risky venture. Usually, it is more expensive to form and maintain an LLC than a sole proprietorship or general partnership. Usually, states charge an initial formation fee. Also, a number of states impose ongoing fees, such as annual reports and/or franchise tax fees.
It is very difficult to transfer ownership in an LLC than in a corporation. That is why most people prefer corporations, where it is much easier to transfer ownership.
Things like no board of directors and difficulty in transferring ownership may limit the life of an LLC.
It is always difficult to transfer ownership in an LLC than in a corporation. For corporations, shareholders can sell shares of stock to increase ownership. Also, unless if the shareholders agree otherwise, they can sell their shares to someone else. In the case of LLCs, unless the members agree otherwise, it is mandatory for all members to approve adding new members or altering the ownership percentages of existing members/an existing member.
How to form an LLC
Choose a state where you want to form your LLC
It is possible to choose to form an LLC in any state even if it will not be doing any business there. Most times, owners choose to form their LLCs in the state in which they are planning to do business. In most cases, it is the state they live in. A major factor that many people consider before choosing a state to form an LLC is the level of administrative costs, state laws, and taxation. It is important to know that LLC laws and taxation vary from state to state. The tax system and laws of a state may either be favorable or unfavorable to a limited liability company.
Choose a registered agent
It is necessary to have a registered agent in the state you want to form an LLC or even registering an existing one.
A registered agent receives relevant legal notices and tax documents on behalf of the limited company. He receives notices, legal documents, and communications that the state secretary mails to him. These include the annual statements or reports, and tax documents that the state’s department of taxation sends. A registered agent has to be available to receive service of process/notice of litigation, these are legal documents. He also receives other court documents like the garnishment order.
Even though the owner of an LLC can choose to serve as the registered agent, there are compelling reasons why a business owner, including the small ones choose a registered agent. These service providers assist with such important requirements.
Most times if the registered agent is not available, the person receiving sensitive documents mishandles them. This is bound to cause serious problems to the company. It is mandatory for this agent to have a contact address, not a post office box.
Prepare an LLC Operating Agreement
It is necessary for every limited liability company to prepare an operating agreement. Almost every state requires this from an LLC. It can be oral in some states, but it is necessary to have a written operating agreement.
Just as the name implies, it is an agreement that takes place among members, and between the company and the members on how they will operate the company. Even when it is a single-member limited liability company, it is necessary to have an operating agreement. It indicates respect for its existence as a separate legal entity from its owners. It gives a chance to what you want to happen in certain circumstances in a written form. For example, if you can no longer manage the business. It gives you room to opt out of certain provisions of LLC laws that you may not want to govern your company.
It is most important for a multi-member LLC to properly draft out an operating agreement. This document clearly spells out the division of ownership, labor, profits, and usually how to settle disputes among the owners. This document should be able to state in detail how to share profits and losses. It is advisable for a legal agent/lawyer to review the operating agreement to ensure that you cover all the bases.
File Your LLC with Your State
In order to make your new limited liability company officially exist, you have to file LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization). You can file it with the Secretary of State’s office or any department that handles business filings in the state which you are forming. Filing fees vary across the states.
LLC Articles of Organization
An article of organization is a part of a formal legal document used to establish a limited liability company (LLC) at the state level. The document creates the rights, powers, duties, liabilities, and other obligations between every member of an LLC. It also states the rights, duties, power, liabilities, and other obligations of the members between the LLC and its members. The state charges businesses to pay a fee when it files the articles of organization. Articles of organization are similar to articles of incorporation and we can sometimes refer to them as a “certificate of organization” or a “certificate of formation.”
Once the state approves the article of organization, it will issue a certificate and other confirmation documents. They serve as legal proof of the status of the LLC and the company can use them to open a business account, obtain EIN, etc. Some states may require that you publish a notice in newspapers and other media, as a confirmation of the formation of the LLC.
Obtain an employer identification number (EIN)
You have to apply to the internal revenue for an EIN service after establishing the business entity. This is the number of identification the LLC will use on all its bank accounts and also income and employment tax filings. Also, in every state in that the LLC will be doing business, you have to apply to the tax department of the state for a sales tax identification number. You should also register with the labor department of the state.
Open a Business Bank Account
Though this step is not a legal requirement, it is a key best practice for anyone who is creating an LLC. Here, separating business finances from personal finances is very necessary and important. This is one of the major factors courts consider when in the course of deciding whether to pierce an LLC’s veil and hold the member liable for the debts of the LLC. Most banks require company details, such as date of formation, type of business, and the names and addresses of the owners. Contact your bank to enquire about requirements prior to opening an account.
If necessary, the company should register to do business in other states
If the limited liability company you formed will do business beyond just the formation state, you will have to register (or foreign qualify) in each foreign state. Generally, this requires filing an application for authorization with the Secretary of State. They will always require a certificate of Good Standing as well. The company will also need to appoint and maintain a registered agent.
There are many factors that determine whether a company is transacting business in a state or not, and therefore needs to foreign qualify. Some of these factors include whether the company has a physical presence in the state, if it has employees in the state, or accepts orders in the state
One should note that different states have different standards. To determine whether your LLC needs to foreign qualify in a particular state, it is advisable to seek the legal advice of a legal practitioner.
To register a limited liability company in Ghana, the basic requirements include; Get a name for the company. The name must be unique, it should not be misleading or undesirable. Next, the applicant has to obtain a tax identification number (TIN). Also, the applicant should indicate the address of the building where he intends to carry out the business. The company should be registered with the Ghana Investment Promotion Center (GIPC). After successful registration, the company will receive relevant documents that will confirm the formation of a new LLC as well as the rules and regulations that will guide the company.
Dissolution of an LLC
There are lots of factors that may lead to the dissolution of an LLC such as;
- Differences of opinion among its members
- Poor management
- Lack of working capital
The plan to dissolve an LLC first has to be a result of the mutual consent of all the members. They have to obtain a certificate of dissolution from the legal authorities. They need to cancel all licenses/permits which they obtained in the formation of the company.
Also, they need to inform all tax authorities about the dissolution through proper documentation. If there are pending salaries of employees, they have to clear them in order to avoid future claims.
The contents of the dissolution notice have to include a formal email address. This is to enable the creditors to send their claims. The company must include the deadline for creditors to file their claims. They need to explain that if the deadline elapses, they will not allow any claim. If the creditors raise a valid claim, then members will have to settle by making full repayments.
The company should distribute assets according to the share of capital each member contributed. The final step is to file the articles of dissolution with the state authorities in charge. This shows the formal date of the dissolution and the reasons behind dissolving the company.
LLC Vs LTD
When we talk about the LLC vs LTD, there are minor differences though they are largely the same. The state laws govern both of them.
The primary difference between the two is that LTDs pay tax LLCs do not.
The acronym “LTD” means limited and we commonly see it mostly within the European Union and affords owners the same protections as an LLC. Generally, they use it to describe an entity, and you will always find that corporations S and C usually end with LTD.
LLCs provide certain benefits such that it allows members partnership and corporate benefits. For example, the tax system can tax an LLC as a C or S corporation, partnership, or sole proprietor. We also consider an LLC as unincorporated. It is best for a single owner and a primary medium for smaller businesses.
Fundamentally, LLCs are more flexible than LTDs in terms of structure. For example, LLCs can operate with just one owner or more members of the group.
Essentially, these two are types of companies. The LTD, which stands for private limited liability company has shareholders with limited liability. The company (LTD) may not offer its shares to the general public since it is a private limited company.
The two terms may look so confusing but despite the slight similarity in name, they are different from one another and have their own advantages and disadvantages.
The main factors that distinguish the two are the liability owners have in the company’s negative actions, the way the company is taxed, and the number of shareholders allowed.
Understanding the difference between LLC and LTD
An LTD is a type of company widely incorporated under the many Commonwealth nations. As far as liability is concerned, shareholder responsibility for company debt is limited to the amount he or she invested in the company. A shareholder’s personal assets are under protection in cases of financial liabilities, it is only the money invested in the company that will be lost. The company pays its own tax on profits as a separate entity (legal) from its owners and shareholders.
Limited liability in LCC means that the owners enjoy protection from some or all liability for the actions and debts of the LLC, depending on shield laws. The business is flexible in nature. It combines some characteristics of both a partnership and corporate structures. Though we consider it as a business entity, it is a type of unincorporated association and it is not a corporation.
The LLC shares some characteristics with corporations in terms of limited liability, and with partnerships in terms of the availability of pass-through taxation. Mostly, it suites companies with a single owner, and also small business entities prefer the LLC. It has the advantage of limited personal liability and a choice of how the tax system should tax the business. The government can tax a limited liability company as a sole proprietor, partnership, S corporation, or C corporation.
Members can choose for the state to tax the LLC as a separate entity or as a partnership entity in which they pass the profits through to partners and tax them on their personal income tax returns.
In summary, an LLC and LTD differ in the following ways;
- In an LTD, shareholder liability is limited to the amount they have invested in the company. On the other hand, the members of an LLC enjoy protection from some or all liability and this varies from state to state.
- Members cannot sell shares to the general public in an LTD while an LLC can involve members ranging from one to infinity.
- The state taxes an LTD as a separate entity, while they can tax an LLC as a partnership, S corporation, or C corporation.
Limited Liability Companies Vs Corporations
First, it is important to understand that an LLC does not incorporate. The formation of this company needs one or more than one business partner and we call these partners members. They set up an agreement and file articles of organization. Here, they split or share the profits and losses among the members depending on their share of capital.
On the other hand, in forming a corporation, the prospective shareholders file a memorandum and articles of association. These documents include the names of every shareholder, every director, and company secretary. A corporation is also a separate legal entity from its owners (shareholders). But unlike an LLC, liability does not pass through its shareholders. A corporation is a legal person capable of meeting its financial obligations.
Limited liability company Laws
Each state establishes LLC laws to govern the formation and establishment of a business entity known as the limited liability company. An LLC as we have stated above is a separate legal entity from the owner or owners of the business. The company can do business, open a bank account, and pay taxes individually. Business owners always go into forming an LLC to enjoy limited liability protection alongside beneficial pass-through taxation. An LLC can have one or many owners and we call them members.
The law considers the following;
- Who Can Form an LLC?
- How Is an LLC Formed?
- Does My LLC Need an Operating Agreement?
- How Does Establishing an LLC Affect Liability?
Who Can Form a limited liability company?
Normally, there are no residency or legal restrictions when we talk about who can start an LLC. Though there are few states that impose an age requirement that members or managers have to be eighteen and above, or the age of consent. The business entity best suits the following group of people;
- Those who engage in any activity that increases the risk of their business being sued or incurring large amounts of debt.
- Possess a large number of personal assets that they want to protect from business liability.
There are certain types of businesses that are not eligible to form an LLC. Though some of these specific restrictions vary from state to state. They usually restrict the formation to banking, insurance, trusts, and professionals like lawyers, accountants, doctors, and architects. It is good for one to check the laws of his country/state before submitting LLC registration forms.
How Is a limited liability company Formed?
Most states request four simple steps to form an LLC, though these laws still vary among states. As explained above, the first thing to do is to choose a state in which to form an LLC and also a name for your LLC. When choosing a name, make sure that no business in your state is using that name. There are specific naming guidelines that the state provides, you should follow them. Secondly, choose a registered agent who will receive relevant legal notices and tax documents on behalf of the limited company.
Also, prepare an operating agreement that shows the details about the management of the LLC, including rights, responsibilities, and the share of profit and losses of all members. File your LLC with your state, the relevant document here is the article of organization and pay the required fee. Next, obtain an employer identification number, open a business bank account. You need an EIN in the course of opening a business bank account. If necessary, register to do your business in other states. Some states will demand that you publish a notice about the formation of your LLC in a local newspaper as the state secretary will designate.
Does My LLC Need an Operating Agreement
There are states that an LLC operating agreement is not a legal requirement. It is important to create one if the LLC has more than one member. This is a legally binding document that dictates rules for sharing profits and losses, establishes voting right for every member, and shows the description of the procedures for meetings and other relevant operations. Having an operating agreement also helps in establishing the existence of your business with the court. Without an operating agreement in place, the business will be subject to the default state rules if a disagreement arises among the members.
Why is the operating agreement essential?
A written (formal and legal) agreement helps to resolve any issue that may come up in the future. In case of disputes between members or owners, this operating agreement serves as a reference document in the course of carrying out mediation processes. In an event of disputes, it may include an arbitration clause. An operating agreement preserves the internal rules of the company. These rules explain how the business partners or members should run the business.
Also, this legal document sets out the procedure on how to add new members and also to raise more funds/capital among the existing members/investors. It is also important because it describes the liabilities of each member.
It is important to note that either a sole proprietor or partnership can form a limited liability company. By implication, an operating agreement for a single-member LLC tends to have fewer details. This goes down to the payment of tax where they would file all their tax returns as sole proprietors. It is quite different from a multi-member LLC which pays taxes as a partnership.
Members can therefore choose either to manage all business operations by themselves or appoint managers who will run the business on their behalf. On the other hand, a shareholder is allowed to be a director in a corporation.
How does establishing a limited liability company affect liability?
When we talk about limited liability protection, it means that members are not personally liable for the financial obligations and the business debts. This means that their personal assets are under protection from legal judgments and the actions of creditors. The extent of protection also varies across states and by circumstances. Before you establish an LLC, it is important to understand how the business will affect your personal liability for business debts, personal liability for your own business-related actions. Also, how the entity will affect personal liability for the actions of other members or employees in the course of the business. You should be able to understand how it will affect business liability for the personal debts of its members.
As we have already seen, owners will not be personally liable for the debts of the business. This implies that when creditors pursue or sue the business, the personal assets and the bank accounts of the owners are safe. There is an exception to this case if an owner personally guarantees a business loan or credit card.
Also, if other members do something wrong in the course of the business, you will not be liable. It is the members that did the actions that will be responsible for their deeds. Members who do not involve in illegal or negligent actions will not be personally responsible or liable for those actions. Every state holds LLC owners personally responsible for their wrong deeds in the course of the business. For example, where a member injures another due to negligence.
Unlimited liability company
An unlimited liability company consists of the general partners and the sole proprietors who are equally and personally responsible for all the debts and liabilities the business incurs. In other words, unlimited liability exists in general partnerships and sole proprietorships.
Unlimited liability means a full/total legal responsibility that business owners assume for all the business’s financial obligations. There is no protection over the owner’s personal assets. This means that creditors can seize and sell the owners’ personal assets to recover their money. The reverse is the case in a limited liability business structure.
Many companies choose to form limited partnerships where the liabilities of the partners cannot exceed what they have invested.
Nondisclosure is a benefit of forming is a benefit of establishing a foreign unlimited liability subsidiary.
For example, if four individuals are working as partners in a limited liability company, each of them invests $35,000 into the newly established business which they jointly own. After a year, the liability that accrues to the company is $225,000. If the company is not able to repay these debts, or if the company defaults on the debts, the four partners are equally liable for repayment.
Examples of countries where citizens commonly form unlimited liability companies include Germany, France, the Czech Republic, and Canada. However, in Canada, they refer to these companies as unlimited liability corporations.
Despite the number of companies and countries that have unlimited companies, the form of company is uncommon in corporations. This is because of the burden that is on the owners to cover a company’s debt, particularly in the case of liquidation.
Establishing a limited liability company has a lot of advantages only if you experience no difficulty raising capital for the business. If you have a team or a group that is willing to invest, you can go for LLC.
Usually, a limited liability company is a common choice among small business owners for the liability protection, management flexibility, and tax advantages it offers. Understanding the benefits and disadvantages of an LLC is important for the success of a business as well as where to form it and other key factors.
It is an important decision to choose a new name for a new company. It is better off if you choose a name that will project the image you want for your company. choosing a name that is easy for customers to remember and spell is also beneficial.
A Kenya LLC requires a minimum of 1 director and 1 shareholder of any country and also who can be living outside of Kenya. After business set up in Kenya, it is a basic requirement for all companies to register for tax with the Kenya Revenue Authority. Also, the company should prepare financial statements, which must always be audited.
Setting up an LLC in the Philippines has become much easier. The regulation no longer demands a complex corporate structure. This has greatly cut down the cost and time to get started in the Philippines. Examples of an LLC in the Philippines are Domestic Corporations and One Person Corporations (OPC). Domestic corporations usually have full foreign shareholders. It is the most common legal entity among foreign investors in the Philippines. The one-person corporation has only one shareholder.
In Nigeria, the corporate affairs commission (CAC) registers LLCs. The companies and allied matters act (1990) created the CAC to supervise the formation and administration of companies in Nigeria. The CAC replaced the federal ministry of commerce and tourism which was the past registrar. The companies act 1968 empowered this past registrar of companies.
Chyou is a published author who focuses on the field of international business. After an established career facilitating mergers and acquisitions for medium to large corporations, Chyou turned to writing to help students better understand international business concepts.