Advantages & disadvantages of a limited company

Written by mario mcdaniel
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The main differentiations of a limited liability company (LLC) are its limited liability and simultaneous pass-through taxation. In essence, this entity gives an entrepreneur the best of both worlds.

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Purpose

An LLC is a business entity designed to give its shareholders the benefits of both a corporation and a partnership. This hybrid form allows the company owners to have limited liability from debts and lawsuits and to be taxed federally as a partnership. Most states implement the same rules for LLCs as they do for corporations, and LLCs have the same powers, including the ability to sue or be sued and to hold property.

An LLC ceases to exist when its period of duration expires, when there are no more members, upon consent of all members, upon an event declared in the articles of incorporation or when ordered by a court to dissolve.

General Characteristics

The General characteristics of an LLC can be summarised in three major points: Members and managers usually are not liable for company debts; the duration or life of an LLC can be continuous in many states; members may freely transfer their interest in losses and profits.

Advantages

The main advantages to an LLC are: limited liability, which means that each shareholder or member is liable only up to the amount he invests; pass-through taxation, meaning an LLC avoids the double taxation inherent to the C corporation form.

Disadvantages

Even though an LLC may sound like the best possible entity for business purposes, it does have disadvantages, including restrictive transfer of ownership. Some jurisdictions can complicate how shares in an LLC are transferred, and because of this, most outside investors typically stay away from LLCs and often require firms to change their corporate structure before venture or angel capital is invested. The duration of a limited liability company can end with the withdrawal of one member.

Conclusion

An LLC is often a good starting point for many small businesses, because it eliminates double taxation but still offers the protection of a corporation. However, if a business owner plans to receive outside funding via venture capital or angel investors, other options should be considered as well.

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