Limited Liability Company definition

Limited liability company definition

There are many different kinds of business structures, and they all carry their own advantages and disadvantages. A limited liability company is one example of a corporate structure, and it is popular because of the way it separates the finances of the company itself from those of its shareholders and directors.

If you are a budding entrepreneur of business owner that is looking to formalise their operations, the structure you give your business is very important. The decision will affect the costs of setting up your business, your level of taxation and how exposed you are if the company should fail. It is concerns about this final point that makes many people go for the limited liability company option.

Here is everything you need to know about setting up a limited liability company.

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Limited liability company llc definition

The concept of limited liability is of central importance to understanding why this option is so attractive to people. Limited liability means that a persons obligation or legal liability to the project only equates to the amount they have actually invested.

So, if you decide to invest £30 in a company and become a shareholder, limited liability means that if the company goes bankrupt, your personal assets cannot be used to pay the company debts. The most that can be taken from you is your £30 share. While the company may be liquidated and all its assets sold off to pay its debts, you will be sure that that your personal finances will never be used.

This is the essence of a limited liability company. It is a company structure where the directors, shareholders and employees of the company are not personally liable for the companys debts or other liabilities.

This makes them distinct from both a sole proprietorship. As the sole owner of a business, you have full liability for its debts and obligations. This means that if for some reason the business can no longer pay its debts, your personal assets will have to be used to pay for them.

Private limited liability company definition

The people that own a private limited liability company are called shareholders, and they each own a limited amount of shares in the business. This gives them a say in how the company is run that is proportional to the amount of the business they actually own. There are differences in the amount of power that shareholders have across different companies, but mostly the company director will have to seek shareholder agreement via a vote for major changes to the company.

The director of the company is the person who is legally responsible for the day to day running of the company. Their principle responsibility is to make sure the company accounts and reports are properly prepared. Directors have to be approved and appointed by the shareholders. While anyone can be director, there are a few restrictions. The person must be over 16 years old, not currently bankrupt and cannot also be the company auditor.

Domestic limited liability company definition

Corporations also have limited liability, but they also tend to be much more complicated legal entities. Limited liability companies are on the whole a bit easier to set up then a corporation, which is classed as an entirely distinct legal entity. This means a corporation technically earns its own income which must then be distributed to shareholders, while the profits made by a limited liability partnership are passed through its owners and reported on their individual tax returns.

Limited liability companies also offer more flexibility in terms of management structure. Corporations have a set formal structure with a board of directors that manage the process of generating profits for its shareholders. Limited liability companies are really free to manage themselves however they like, as long as it is signed off by the shareholders.

Limited liability company definition

Limited liability partnerships also bear a number of similarities with, as well as important differences from, partnerships. While the process of forming both is very similar, the main difference is in the liability of owners. In a partnership, each partner has a personal liability for any debt the project incurs. All partners also have a personal liability for the actions of all other partners. What this means in practice is that if one partner enters into a faulty contract or crashes a company car, all other partners are responsible for paying the costs.

It is here that the main advantage of a limited liability company really begins to shine through. For many people, it is the best way to have the benefits of being involved in a company while having the most protection if something should go wrong.

Advantages and disadvantages

Knowing how a limited liability company differs from other kinds of legal structures is one thing, but it doesnt really give you a full view of the potential pros and cons.

Aside from the fact of limited liability itself, taking a chance on this kind of corporate structure for your business can have a number of other advantages:

Status

You will likely be seen as a more professional organisation than if you are working as a sole trader. Mainly because your accounts and other important information is more readily available for public scrutiny.

Tax-efficiency

You can legally pay less tax on the money you pay yourself. If you want to know more, book yourself an appointment with an accountant at an accounting franchise or company.

Protection

Your business name cannot be used by another business entity, helping you establish a unique brand identity.
Raising capital

If you want to raise more capital, you can sell shares. Investors will also have limited liability.

Credibility

A lot of companies wont work with a business that is not either a corporation or a limited liability partnership. You could be limiting the amount of opportunities open to you if you stay a sole trader.

There are also a number of potential disadvantages. Firstly, there are a lot of legal requirements, such as annual accounts, tax returns, setting up PAYE and VAT returns. If you miss a deadline or fall behind you could be opening yourself up to a hefty fine. Another key disadvantage when compared to a sole trader is that it is much more complicated and long-winded to dissolve the business.

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