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Business Studies Notes 3
rd.
Year
Undergraduate / Graduate Level
SUBJECT: The limited
liability of
shareholders
Authors: (Original Study Notes and Lecture Notes prepared by Mr. K.P. Saluja (M.B.A. from Indian Institute of Management Ahmedabad), and by Mr. K. K. Prasad (M.B.A from IGNOU Delhi) These notes are intended to be used by undergraduate students, completing Year 3 Business Degree Courses. These notes will help undergraduates and graduates complete case studies, coursework assignments and pass exams in Business Studies and Economics.
TABLE OF CONTENTS
(1) Limited liability definition (2) How limited liability works (3) Limited liability in incorporated businesses (4) Types of limited liability (5) Characteristics of limited liability company (6) Types of limited liability company (7) Advantages of limited liability company (8) Disadvantages of limited liability company
Limited liability definition
Limited liability, conditions under which the losses that proprietors (investors) of a business firm might cause are restricted to how much capital put by them in the business and don't stretch out to their own resources. Acknowledgment of this guideline by business ventures and states was an essential figure the improvement of huge scope industry, since it empowered business worries to prepare a lot of capital from a wide assortment of financial backers who were naturally reluctant to with their whole private fortunes in their investments.
Limited liability in incorporated businesses
In the context of a private company, becoming consolidated can furnish its proprietors with restricted risk since an integrated organization is treated as a different and free legitimate element. Restricted responsibility is particularly alluring while managing in businesses that can be dependent upon massive losses, like insurance. A LLC is a corporate construction in the US by which the proprietors are not by and by responsible for the organization's obligations or liabilities. Restricted obligation organizations are mixture substances that consolidate the qualities of a company with those of a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships. The primary difference between a partnership and an LLC is that an LLC separates the business assets of the company from the personal assets of the owners, insulating the owners from the LLC's debts and liabilities. As an example, consider the misfortune that befell numerous Lloyd's of London Names, who are private individuals that agree to take on unlimited liabilities related to insurance risk in return for pocketing profits from insurance premiums. In the late 1990s, hundreds of these investors had to declare bankruptcy in the face of catastrophic losses incurred on claims related to asbestosis. Balance this with the losses incurred by investors in the absolute greatest public organizations that failed, like Enron and Lehman Siblings. In spite of the fact that investors in these organizations lost their interests in them, they were all not expected to take responsibility for the many billions of dollars owed by these organizations to their lenders resulting to their liquidations.
Types of limited liability
Limited Liability Partnership An LLP (Limited Liability Partnership) has features of both a partnership and a company. As per regulations, two partners have to be there to register an LLP. An important feature is that the liability of the partners is limited to the extent of their contributions in the partnership. Private Limited Company Any business entity formed as per the regulations of the Companies Act 2013, where the shares are held privately and cannot be freely transferred to the public. A private limited company can have a maximum of 50 shareholders, while a minimum of 2 must be there at the time of incorporation. Public Limited Company It is a type of entity defined in the Companies Act 2013 as an entity whose shares can be held by the general public. The shares can be traded on stock exchanges or subscribed through Initial Public Offering (IPO). A public limited company is formed with a minimum of 7 shareholders.
Characteristics of Limited Liability Company
We either see sole proprietorship/partnership or corporation, but we don’t often come across with LLC. Because it’s a hybrid type, a combination of both, some of the characteristics LLC are as follows; Separate Legal Entity As a separate legal entity means that LLC is legally divided and separate from its owners. In simple words, LLC can run its business operations and carry on even if all the members have withdrawn from it. When then do, it would recruit and
The functionality of LLC is much simpler and easier where it doesn’t have to conduct meetings and record every minute of it. Management of record and other operations are also much simpler than the corporation. The roles of members are also flexible comprising of casual day to day activities. But it’s important to be familiar with the LLC laws of the country before starting it.
Types of Limited Liability Company
Some of the types of Limited Liability Company are as follows; Single Member LLC Single Member LLC, as the name implies, is comprised of only one member. However, the law doesn’t treat single-member LLC a separate legal entity. Therefore, its income has to pass through the tax return of its member for taxes. Apple started as a single-member LLC when Steve Jobs created the computer in his parents’ garage. Multi-member LLC Multi-member LLC is comprised of more than one member. Unlike single- member LLC, the law treats multi-member LLC a separate legal entity. Therefore, they can enjoy the advantages of corporations and partnerships. Facebook and Microsoft are the world’s leading tech companies, and they started as a multi-member LLC. Non-profit LLC As the name implies, such companies are not for profit. Therefore, they can enjoy the no tax benefits like churches and can have limited liability and
flexibility like partnerships and corporations. But some countries do not allow the formation of non-profit LLC. Professional Limited Liability Company People having a professional license like the doctor, engineer, architect, or lawyer can create PLLC. The purpose of creating professional LLC is to provide medical, legal, and other services. Famous LLC IBM, Sony, Pepsi-Cola, Nike, Blackberry, and eBay are some of the famous LLC in the world. LLC Vs Corporation Limited Liability companies comprise of few members like corporations. But the law treats them as a sole proprietorship or partnership in terms of taxes, and it provides flexible liability like corporations. It also goes by the name of S Corporation, S means sole Proprietorship that it has a tax advantage. Corporations, on the other hand, comprise of members (shareholders and board of directors), and the laws them a separate legal entity that provides limited liability, but the income is taxed twice. It goes by the name of C Corporation.
Advantages of Limited Liability Company
Some of the advantages of Limited Liability Company are as follows; Tax Option LLC has an option of taxation that whether they want to be taxed like a partnership or corporation; single taxes or double taxes depending on their choice. Usually LLC prefers single taxes.
Ownership Transfer It’s very difficult to transfer your ownership in LLC than corporations. That’s why people prefer corporations, where transferring ownership is much easier. Limited Life Factors like no board of directors and difficulty in transferring ownership make the life of LLC limited.
References
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