A limited company, also known as a limited liability company (LLC), is a type of business ownership that determines many aspects of the way the business is run. It shares some aspects with a privately owned company, some with a partnership, and some with a corporation. There are both advantages and disadvantages to setting up a company with this type of structure.
In the United States, it's fairly easy for form a limited company. First, the owner or owners of the company, who will be called "members," must file articles of organization with their state's secretary of state. Each state has specific laws about how these articles should be written.
The members of the company must then pay the required fees to the state. Each state also has guidelines about other matters that may be required, such as filing an operating agreement, or making a public notice of the company's formation. Once a limited company is formed, the members gain all the benefits of the structure, as well as all the disadvantages.
One of the main benefits of a limited company is that, as the name suggests, the liability of the members is limited. Members of the company are not responsible for its debts, as it is treated as a separate individual in its own right. All of the debts are the responsibility of the company, and cannot be passed on to its members. In this way, the company operates in much the same manner as a corporation, but with fewer restrictions and requirements of the members.
Corporations, for example, have the disadvantage of double taxation. The corporation is taxed on its profits, and the members are taxed on their income. In a limited company, the company is not taxed on its profits. Each member pays the tax on his or her own profits. This is known as flow through taxation.
While a limited company has distinct benefits for its members, it also comes with disadvantages over other types of business. It has much more paperwork and different rules to follow than a partnership or sole-proprietorship. In addition, members must participate in the running of the company, or they are considered investors. If the members are investors, then their share of the company is considered a security. Rules of the Securities and Exchange Commission (SEC) will apply, requiring more paperwork and regulations, unless the company qualifies for an exemption.
With many advantages and disadvantages to forming a limited company, business owners and investors have a lot to consider. This ownership structure is not the perfect business type for every business, but many find it both secure and advantageous.