Limited Liability Definition
A limited liability is more commonly called a limited liability company, or LLC. It is a fairly new business entity and it serves as an alternative to a partnership or other type of corporation. An LLC offers similar advantages to those offered through a partnership and other corporations, so opting for an LLC should be based upon what makes the most financial sense for your business. The owners of an LLC are referred to as members versus shareholder or partner; each member has a monetary interest in the company. At present, there is no limit as to how many members can make up a limited liability company.
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Benefits
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There are several advantages to opt for an LLC. The members have very limited responsibility for the debts and liabilities of the company. A limited liability has "pass through taxation," which means that the gains and losses of the business are reported on the each member's personal income tax returns. The management structure of an LLC is very flexible. An LLC does not have to complete as much financial and tax paperwork at the end of the year as other corporations (see References).
Warning
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There are also some of the disadvantages of opting for an LLC. It is very hard to transfer ownership because any business transfers have to be approved by all members. In addition, raising additional capital to expand the business of an LLC can be tricky for the same reason--every member has to approve any new members. Because LLCs are still considered to be a new business entity, the laws pertaining to its precedence are not set in stone. Also, based on the state where the limited liability was formed, the lifetime of the company may be limited (see References).
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Types
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Members of a limited liability company can have the income generated from the company taxed the same way as a partnership or other corporation, that is, as an S or a C Corporation. However, in order to be taxed the like a C Corporation the members have to specifically elect to do so.
Significance
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Another perk to a limited liability company is that the company is not required to hold any recorded annual meetings. Of course, it would be in the members' best interest to hold regular meetings to ensure everyone is fully apprised of the company's state of affairs.
Considerations
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As there are not any member restrictions, a business operated by an individual can become an LLC. This would be the ideal road to take if the business owner would like to protect his personal asset if the business were to run into legal problems or goes under. It differs from a sole-proprietorship because it would operate as a separate business entity (see Resources).
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