Advantages of a Limited Liability Company - Essay Example

Limited Liability Company Limited Liability Company Introduction A limited liability company can be described as a supple form of business enterprise that combines aspects of partnership and corporate features. Basically, a limited liability company is not a corporation; instead it is a legal type of company that offers limited liability to its stakeholders. Limited liability singularly is described as the amount that is invested in a company. The shareholders are allowed to claim ownership only up to the respective amounts that they have invested in the business. General partners, alternatively, are bound by an unlimited liability (Martin, 2011). In the event that partners or external third parties decide to file a lawsuit, in actual sense they would be suing only the company with the exclusion of investors/stockholders. They are not held liable for such matters as loans as well as other debts owed by the company. In contrast to them, investors, general partners, and sole proprietors are considered to be liable for such business debts all through. Limited liability is fundamental in the exclusion of certain parties from being held liable for such liabilities. Advantages of a limited liability company Limited liability companies have a lot of advantages that I would say, arguably, outweigh the disadvantages regarding the same. It is therefore advisable that Robert, Sarita, and Phillip to start convert their company ‘IN THE EVENT’ into a limited liability company. The respective advantages of a limited liability company are as follows. A limited liability company is referred to as a separate legal entity because it is the only form of organization capable of having a legal existence that is separate from the stakeholders. The mere existence of a limited liability company provides for the limited liability security or protection to its own members or owners. This could be arguably the most imperative advantage of this form of company. They are basically not personally accountable for the company’s business debts and liabilities. Creditors are legally crippled to pursue the personal assets (houses, savings, and etcetera) of the business’s stakeholders in order to earn back their business debts (Macintyre, 2010). This is in contrast to many other contrasting forms of business. The only liability that members have to bear is that for the amount that they are yet to pay on shares. In the event that things do go wrong, the only losses encountered by the members would be the value of shares as well as any loans made by the members to the company. However, there is an ambiguity. The protection of limited liability companies does not go as far as to cover frauds. In the unfortunate occasion that creditors incur losses via direct fraud, there is no limit to personal liability. A limited liability company typically does not pay taxes at their business level. Business income or loss of any kind is passed on to owners and is further reported on their particular personal income tax returns (Keenan, & Smith, 2000). All taxes are considered to be due at the personal level rather than the company’s. The formation of a limited liability company is bound to aid in the establishment of credibility with various potential customers, vendors, partners, and employees. This is owing to the fact that the formation of a limited liability company is generally viewed as a form of commitment to one’s business. Credibility is the basis of all success in business. A limited liability company faces minimal state-imposed yearly requirements as well as ongoing formalities in contrast to other corporations. As much as the government is a necessary element for business to thrive in a country altogether, minimal government interventions are highly appreciated by business as such an opportunity allows a business to manage its affairs as best as deems fit. A limited liability company is free to create whichever organizational structure that is agreed upon by all the company owners. It can be managed by managers or the various members of the company. They are authorized to make major decisions affecting the company. This is in opposition to the requirement of a board of directors in order for decisions to be made. Generally, a limited liability company suffers very few restrictions in terms of ownership. The question of who can be an owner in such a company, or even how many there are supposed to be is governed by considerably few restrictions. The issue of transfer of selling of shares is a comparatively clear-cut process; this is in spite of the fact that existing shareholders are cosseted through their various preemption rights and also via company legislation that are in charge of safeguarding the minority investors’ interests. Additionally, the process of lending to another company is much easier in comparison with other forms of business. The lending bank could secure its loans against particular assets of the enterprise. In the case of a limited liability company, the selection of a company is strictly restricted (Pylodet, 1873). Provided a selected name conforms to all the rules in place, there are restrictions that prohibit other parties to use it as well. This is as opposed to sole proprietors and partnerships whereby trademark legislation is the sole protection for one’s name. In terms of continuity, once a limited liability company has been formed, it has a perpetual life. The directors, managers, and employees are the agents of the company. If they happen to leave, retire, or die, the company carries on with its existence. A limited liability company can only be concluded by wrapping up, liquidation, or through court orders. Limited liability companies have better pension schemes than most other forms of business. This is owing to the fact that they have approved pension schemes which in turn provide more desirable benefits than those that are under contracts to sole traders. Disadvantages of a limited liability company In order for these three business people to be fully aware of the risk they are partaking in, it is important that the issue of disadvantages of limited liability companies be addressed as well. This would be fundamental in aiding them to weigh all their options. The formation of a limited liability company is potentially quite expensive. There are start-up fees to be paid, not mentioning the seemingly endless procedures and steps to be taken. Transfer of ownership in a limited liability company is considerably is harder as compared to other forms of business (Wood, 2001). The current owners need to agree unanimously either through the addition of new owners of the alteration of their ownership percentages. The limited liability company business structure has generally less precedent in terms of case laws. This is due to the fact that it is a relatively newer structure. Form of Limited Liability Company I would advise them to form a partnership form of limited liability Company for the reason that there are three members involved. Thereafter, is would be advisable for them to file Form 8832 which would get the elected as a corporation. Naming of the limited liability company They could definitely retain their current business name if they so desire provided certain rules are observed. The rules that govern the naming of a limited liability company are simple. Their business name should be different from all others in the industry. In other words, there should not be another limited liability company out there with a similar name at all. Additionally, they must make some certain adjustments to their business name such that it clearly denotes or indicates its status as a limited liability company. The new company should be: IN ANY EVENT LIMITED LIABILITY COMPANY. The name should not be modified to include specific words restricted by one’s state; for example ‘bank’, ‘insurance’, and etcetera (Reuting, 2011). The business name is usually routinely registered with ones’ state when one registers their business. A separate repeated process would be unnecessary. Raising of capital for the limited liability company For a limited liability company to be formed, of course there needs to be additional capital for funding the expansion project. In this case, the owners wish to gain the capital yet still maintain sole ownership of their business. They could borrow loans from their families and friends. These are people who are in better positions to help them. They could ask for loans with the promise that they would pay at a later agreed upon date. Such an agreement would not tamper with their control of the company. They could very easily put in some of their own resources. Personal investment in such a situation is the most obvious and viable option. Each one of the three owners could loan the company some of his/her extra assets in order to enhance a stable commencement for their limited liability company. Thereafter, they could feel free to collect back form the company whatever amount they are owed. This would help them maintain sole control of their company. The business could sell small shares of the company to the public. This is a step that would ensure that their ownership and control over their company is maintained considering that they would actually possess majority of their shares while simultaneously gaining capital and support from the mass public. The business could borrow an adequate amount of money from the bank. In the event that they live up to their agreement with the bank, there would be no reason whatsoever for their authority and control over their company to be threatened by this course of action. Business structure of a limited liability company The process of structuring a business is very vital as it determines the progression of various business operations which in turn determines the success of business in the long run. The first step in the structuring of the business would be to choose the right name for their new business. As much as they would wish to retain their previous name, they should ensure that it is just right for their intended purposes. The company’s name should be one that draws the desired attention from the anticipated crowd (Wild, Weinstein, & Keenan, 2009). The name would be the company’s image to the world and therefore it should be adequate enough. The business should strive to make it available to the public by providing the particular essential contact information as well as an explicit description of its activities and intentions. It should set goals and plans that are meant for the general public. The company should come up with an Operating Agreement. An operating agreement is highly advisable for such a limited liability company as it has more than one member. This is majorly because it structures the company’s finances as well as organization. It also provides for rules and regulations to ensure the smooth running of operations. This kind of agreement would involve percentage of interests, profit and loss allocations, rights and responsibilities of the members along with other provisions. The business should obtain the various licenses and permits for their activities. For any business plans to succeed, the law has to be on its side. Its policies and activities must coincide with the laws governing that particular area (Cody, Hopkins, Perlman, & Kalteux, 2007). The acquiring of licenses and permit would be a sign of conformity with the law. The business should hire the necessary skilled employees for the available jobs. Employees are one of the most principal organs of a business (Alberty, 2003). Without human labor, plans would not be achieved at all. The right kind of labor is hard to come by. Therefore the business should ensure that it attains the very best. Publicizing one’s business is one other very important aspect of success in the industry. People need to be made aware of a new entrant into the market in order to be drawn in. the business needs to appeal to the masses as a way of attracting market and drawing healthy attention to itself. It is also a way of making the competition aware of a new entrant into the market. Research trail This work has been properly compiled with data and information from a wide variety of sources which I had access to. I managed to use books for starters. I retrieved a lot of information from certain books concerning limited liability companies. The most helpful books of all include the Law for Business Students 7th Edition by Adams from chapters 20-23. This book provided majority of the information I used to write the entire essay in particular the advantages of limited liability companies section. Business Law by Keenan & Riches 11th Edition Chapter 6; chapter 6 of this book provided majorly the information to do with the methods of raising capital for a limited liability company while retaining one’s authority and control. The third principal book that I deployed was Introduction to Business Law 2nd Edition by Jones, between chapters 15-17; this one provided additional information on the advantages of limited liability companies. Essentials of Business Law 4th Edition by Maclntyre Chapters 10& 11; this one was essential for the writing on the structure of the business altogether. Business law 5th Edition by MacIntyre and Smith and Keenan’s Company Law 15th Edition by Wild & Weinstein were extra sources. Moreover, I used internet journals and articles. I managed to find some very useful sites online; for instance, www.companieshouse.gov.uk. This was helpful in terms of viewing limited liability companies with regard for the law. Additionally, the Wall Street Journal online did aid. I considered these sources to be quite relevant owing to the fact that they did contain the necessary material for the compilation of this essay. Each one of the sources had something small to offer, which formed at least a piece of the essay. It was not easy to navigate through all the extensive information, particularly in the books. The information was however reliable and pertinent to the essay. In conclusion, limited liability companies are a very viable option for this kind of business. The three associates intend to maintain full control of their company and this allows them to do that. I would generally advise them to go for it all the same. References ALBERTY, S. C. 2003. Limited liability companies: a planning and drafting guide. Philadelphia, PA, American Law Institute-American Bar Association Committee on Continuing Professional Education. CODY, T., HOPKINS, D. A., PERLMAN, L. A., & KALTEUX, L. L. 2007. Guide to limited liability companies. Chicago, IL, CCH. ELSTER, J. 1990. The cement of society: a study of social order. Cambridge [u.a.], Cambridge Univ. Press. HUMPHREYS, T. A. 1998. Limited liability companies. New York, N.Y., Law Journal Press. KEENAN, D., & SMITH, K. 2000. Smith & Keenans advanced business law. Harlow [u.a.], Longman. CODY, T., HOPKINS, D. A., PERLMAN, L. A., & KALTEUX, L. L. 1945. Whos who in Chicago and Illinois. Chicago, A.N. Marquis Co. MACINTYRE, E. 2010. Business law. Harlow, Essex, England, Pearson Longman. MARTIN, A. R. 2011. Limited liability company & partnership answer book. Austin [Tex.], Wolters Kluwer Law & Business. PYLODET, L. 1873. The Publishers trade list annual. New York, R.R. Bowker Co., Office of the Publishers weekly [etc.]. REUTING, J. 2011. Limited liability companies for dummies. Hoboken, NJ, Wiley.  WILD, C., WEINSTEIN, S., & KEENAN, D. J. 2009. Smith and Keenans company law. Harlow, England, Pearson Longman. WOOD, R. W. 2001. Limited liability companies: formation, operation, and conversion. New York, Aspen Publishers. Read More