The Basics of Forming a Limited Liability Company
A limited liability company (LLC) is one of the best types of corporation to form because of the protection it offers. Shareholders enjoy limited liability, meaning they aren’t personally responsible for corporate debts and losses. This legal structure encourages entrepreneurs to take business risks and boost the economy.
This article will explain the basics of forming an LLC.
What Is An LLC?
It is a corporate structure that protects its owners from personal liability for incurred debts. It also offers pass-through taxation, meaning the profits can be passed to the respective owners and taxed at the individual rate.
Most big corporations are structured as LLCs. You’ll hardly find a major corporation structured as something else because LLCs offer the best benefits for any business with many shareholders.
Advantages Of LLCs
The primary advantage of an LLC is the limited liability protection. You can conduct business with peace of heart, knowing that creditors won’t go after your personal assets if the venture fails. Of course, this protection doesn’t mean you’ll make reckless decisions; the protection veil can be pierced if the owner is found to have committed fraud.
Without this limited liability protection, business activity would be lower worldwide. People will fear starting businesses because they risk losing personal assets if they fail. LLCs give entrepreneurs to ability to fail and get back up again. It’s one of the best inventions of the 21st century.
The taxation system for LLCs is very simple. You can choose to be taxed as a sole proprietorship or partnership. The owners can pass through the LLC’s profits to their personal income and pay taxes at the individual rate. This way, they avoid paying both corporate taxes on the company’s profits and taxes on personal dividends, ala double taxation.
Easy to Set Up
The process to set up a limited company is now as easy as ever. You can fill out your application, submit the required documents, and get approval entirely online; visiting a physical office is unnecessary. In the UK, you can register a limited company in as little as 24 hours and start conducting business.
Easy to Manage
Limited companies are easy to manage even if there are many shareholders involved. Initially, you’ll choose a share capital (total number of shares) and allocate specific amounts to each shareholder. The greater the number of shares a person holds, the greater their power over corporate affairs.
Your company can easily sell shares to outside investors, and they can start voting on corporate matters. LLCs are the best option if you plan on raising capital from outside investors.
Disadvantages of LLCs
An LLC costs more to register than other types of companies. Many jurisdictions charge an initial incorporation fee plus extra recurring fees to keep the registration valid.
LLC owners must adhere to strict regulations. They must maintain separate personal and corporate accounts or lose their liability protection. They must also keep records of every board meeting to refer to in case of disputes. Creating a limited company means you may need to hire a secretary to handle administrative tasks.
Documents Needed To Form An LLC
- Personal identification for all shareholders and appointed directors.
- Proof of name reservation for the company.
- Articles of Association: A legally binding document outlining the regulations governing the business.
- Memorandum of Association: A legally binding document signed by all shareholders declaring their intention to start a business.
- Proof of a physical office address to receive mail correspondence concerning corporate and legal matters.
We have explained the basics of forming an LLC, including its advantages and disadvantages and the required documentation. At this point, it should be clear if a limited company is the best option for you.