Starting-up a Business: U.S. Limited Liability Company, (LLC).
But what is a limited Liability Company and what does that really mean and is it appropriate for me?; these are very real questions that stop people developing because of what somebody has said or a general lack of knowledge about forming a company and a developing an idea. We all have ideas about making a stable job and sometimes we are blessed with an idea that becomes a life changer.
The U.S. Limited Liability Company,(LLC), is a very good compromise and an advanced natural development from both the sole proprietorship,(sole trader) and partnership business models having distinct advantages in the realms of low personal taxation and low personal liability. That allows and encourages the fostering of wealth without the high risks that can be attributed to the kick-start business models that often originates at high personal risk whilst creating a viable company at low cost.
This model is a departure from the 'flat earth' management of an ill conceived partnership towards the Western Pyramid form of management and accountable responsibility that is regulated with state legislation within a low risk and low taxation regime to encourage entrepreneurship in it's best form.
The American LLC model is relatively new to the U.S. Business Community that has only been available to all states in the past couple of years. It has a measure of uniqueness and simplicity because it achieves the 'half-way-house' between the high personal risk Partnership Model and a the high taxation and benefits of a fully fledged corporation.
The limited liability firm has as managers or directors people who either own the whole business or a percentage of it expressed as shares with other member/ directors. The company can also be managed on a day-to-day basis by non-member/directors as employees to run the business.
Disadvantages of Forming an LLC The limited liability company is formed within the constraints of individual state legislature by filing the firms Articles of Organization in the state where the company is being formed with the appropriate Secretary of States office. This aspect makes it more difficult, complex and costly than either the sole proprietorship or the standard partnership business models; there are much more paperwork and legal requirements to forming an LLC but is less of a burden than forming a corporation. There still exists a potential for conflict at the top of the organization amongst the directors or members that is not dissimilar to the partnership circumstance but with considerably reduced personal liability.
All states charge fees for starting an LLC, some charge a one-off fee allowing the firm to exist in perpetuity while others charge an annual franchise fee that in some cases runs into hundreds of dollars in exchange for the right to operate as a limited company.
For single or low member counts in an LLC there still exists the plight and perplexity for the potential of a lack of business continuity in the event of a member/director becoming incapacitated, divorced or dies which is a similar scenario to the partnership and the sole proprietorship business models. This is mainly because owner directors frequently fail to delegate skills and responsibilities down the company structure and so if the owners skills and talents disappear then so does the business unless provisions in the Articles of Organization have been made for company. And this feature often precludes or compromises the opportunity of the enterprise to raise capital as an independent business and leads to members raising investment capital through equity release loans on personal property or over-draft facilities secured by personal assets such as the family home.
Advantages of forming a Limited Liability Company
In a very similar way to that of a shareholder of a listed corporation the members or owners of an LLC each have their liability or exposure to risk limited to the level of their investment. And unlike the partnership or sole proprietorship business models none of the members carry any personal liability and neither do they have to be involved in the day-today management or running of the business. This gives this model more flexibility to respond to change and makes it more attractive to investors and therefore easier to raise out-side investment capital than a sole trader or group of partners.
In most states this business model is taxed as a partnership where the profits and losses are divided between the members and are taxed at an individual level that is not influenced or encumbered by another members personal tax circumstance.
The LLC is less regulated than corporations in how profits and losses of the company are allocated to individual members. For example a member may be allocated a higher percentage of the profits or losses than what the members original investment would normally attract under the rules of a corporation.
The company has the ability to take an alacarte approach to managing the company; it may be member managed or managed by non-members or a mixture of members and hired managers/ employees.
This business model presents a legal framework that provides a very good opportunity and natural progression to an LLC, And may be used to solidify a business idea that has been proved viable in either the partnership or sole proprietorship models. Because as a business grows the liabilities also grow along side the success and possible failures. This entity can be used to commercialize the business and to cap personal risks, formalizing the entity in preparation for and as a stepping stone towards the birth of a fully fledged corporation |