PROJECT OF

COMPANIES ACT
“LIMITED LIABILITY”- AN EXAMINATION OF THE CONCEPT FROM LEGAL AND ECONOMIC
PERSPECTIVES

SUBMITTED BY –PRABHAT KUMAR JHA

ROLL NO -29,B.A.LL.B 8TH SEM

SUBMITTED TO –MISS. __________________

FACULTY FOR COMPANIES ACT

INDIAN INSTITUTE OF LEGAL STUDIES, SILIGURI

1|Page
 ACKNOWLEDGEMENT

I, Prabhat Kumar Jha studying in the 5 year B.A.LL.B Semester 8th of Indian
Institute Of Legal Studies, would like to state that in the completion of the project
report of Companies Act on the topic ““LIMITED LIABILITY”- AN EXAMINATION OF THE
CONCEPT FROM LEGAL AND ECONOMIC PERSPECTIVES” I have received a lot of

encouragement and support from various quarters which need special attention.

I would first and foremost like to thank and present my sincere gratitude to my
teacher, Mrs Shruti Das Gupta ma’am who acted as a guiding light for me and
helped me with the completion on this project report. I would also like to thank
my friends for their co-operation and support which helped me in successfully
completing my project.

2|Page
 RESEARCH METHODOLOGY
Aims and Objectives:

This research paper looks at meaning and legal provision under Companies. Act.

Scope and Limitations:

Due to space constraints, the paper is limited to a brief discussion of the points set above.

Research Questions:

What is LLC?

What are the role of LLC ?

HYPOTHESIS

The researcher hypotheses tha Limited liability companies (LLCs) have become
the most common typeof new business since their introduction by state laws in the
last 30 years because LLCs combine the tax advantages of partnerships with the
limited liability of corporations..

Method of Writing:

An archival method of writing has been followed in the paper. Analysis based on the presented data has
been attempted.

Sources of Data:

Secondary sources of data have been used while researching for the paper.

Style of Citation:

A uniform style of citation has been followed throughout the paper.

3|Page
CHAPTERISATION

1. INTRODUCTION
2. CONCEPT OF LIMITED LIABILITY COMPANY
3. ADVANTAGE OF LLC
4. DISADVANTAGES OF LLC
5. REDUCING PERSONAL LIABILITY
6. FORMING AN LLC TAX ADVANTAGES
7. Deductible Employee Benefits
8. LLCs and Asset Protection
9. LLCs and Anonymity
10. Broad Range of Powers
11. Separate Liability for Corporate Debts
12. CONCLUSION
13. BIBLIOGRAPHY

4|Page
1. INTRODUCTION

Limited Liability Company is another category of company registered under

the Indian New Companies Act, 2013. There are numbers of companies are
available in India including private limited and public limited ones but
Limited Liability Company is a brand new one in the line. It's often called as
a Limited Liability Corporation and its nature of business is quite similar
with partnership firm and sole trade business. Company is an association of
persons or an artificial person formed under the Indian Companies act in
order to carry out a certain business. Under the Limited Liability Company
Act, liability is limited among members or partners and no one is responsible
for other's misconduct and responsibilities in any case. Limited liability
company registration has been extensively growing due to its many
advantages over other form of business enterprises.

5|Page
 2. CONCEPT OF LIMITED LIABILITY COMPANY

A limited liability company, or LLC is a business organization structure that allows

for certain favorable tax treatments, as well as personal liability protection, for the
“members” involved. It is important to note that the specific structure and status
can vary from state to state so complete consideration to the state’s laws in which
the LLC will be formed is crucial.

An LLC as a business structure model allows for multiple owners, or “Members,”

and a “Managing Member,” to enjoy limited liability. The Managing Member is
typically the figure head of the organization and is responsible for it’s
management. The profits or losses of the business organization pass directly
through to the Member’s personal income tax return (IRS Form 1040). The LLC
files a Form 1065, then lists each member’s taxable profit on IRS Form K-1. The
net profit of the LLC is not considered to be income earned by the Members
(though it can be for the Managing Member as a special “fringe benefit”
treatment–see below), and thus is not subject to self-employment tax.

6|Page
 3. ADVANTAGE OF LLC
 An LLC allows for an unlimited number of Members; however, if the LLC
has just one owner (Member), it will be taxed as a sole proprietorship.

 The LLC allows for the “special allocation” of profits–the disproportionate

splitting of Member profits and losses (in different percentages than their
respective percentages of ownership). This means that Members can enjoy
the benefits of receiving profits (and writing off losses) in excess of their
individual ownership percentage.

 The Members enjoy Limited Liability, which means they are mostly
personally protected from any liability of the LLC and successful judgments,
as well as from the LLC itself.

 Managing Members’ share of net profit is considered earned income because

the Managing Member is considered to be an active owner–therefore
qualifying the Managing Member for special “fringe benefit” treatment.

 The Members’ share of the bottom-line (“net”) profit of an LLC is not

considered earned income, and therefore is not subject to self-employment
tax.

 Members are compensated using either distributions of profit or guaranteed

payments. A distribution of profit allows each member to pay themselves by
merely writing checks–whenever they need the money (provided the
business has the available cash). Guaranteed payments represent earned
income to the members, thereby qualifying them to enjoy the benefits of tax-
favored “fringe benefits.”

 The Managing Member of an LLC can deduct 100% of the health insurance
premiums he or she pays, up to the extent of their pro-rata share of the
LLC’s net profit, because the profit is considered earned income. Note: If a
member has earned income, he or she will also qualify.

 A Corporation can be a member of an LLC. This allows you to create an

additional level of ownership, which is designed to create an entity that can
offer such traditional “fringe benefits” as retirement plans and an additional
level of protection from liability.

7|Page
 As a Member, you can contribute capital or other assets to the LLC, or loan
the LLC money to put dollars or value into the business. You can take
dollars out by taking a repayment of your loan (plus interest), a distribution
of profit or a guaranteed payment. If any of the members die, the LLC can
continue to exist–subject to the unanimous positive vote on the part of all
remaining members.

8|Page
4.DISADVANTAGES OF LLC
 Each Member’s pro-rata share of profits represents taxable income–whether
or not a member’s share of profits is distributed to him or her.

 The Managing Member’s share of the bottom-line profit of the LLC is

considered earned income, and therefore is subject to self-employment tax.

 The Members’ share of bottom-line profit is not considered earned income

because the Members are considered to be inactive owners; therefore, the
Members do not qualify for special tax-favored “fringe benefit” treatment.
 As a member of an LLC, you are not allowed to pay yourself wages.

 Additionally, the LLC shares a few benefits over other business structures–
for example, while a Sub-chapter “S” corporation may allow for many of the
same protections and asset distribution facilities, they are limited to 75
“stockholders,” and none of these stockholders can be in the form of a
Corporation nor IRA’s (in direct contrast to an LLC which does permit
Corporations as “Members”)–thus limiting this option to smaller
organizations or forcing the buyback or buyout of stockholders for those
organizations wishing to convert.

 The main reasons for LLC Formation or Limited Liability Company

organization are lawsuit protection, credibility, tax savings, deductible
employee benefits, asset protection, anonymity, the ease of raising capital,
creating a separate legal entity for personal protection, Forming an LLC has
a broad range of powers beyond that of a sole proprietorship, small claims
court benefits, separate liability for corporate debts, and perpetual duration.
After LLC Formation or LLC incorporation you create a separate legal
person. You are a shareholder. You can control the corporation. However,
when your business is sued you can be protected from being sued personally
after Forming an LLC or LLC Formation.

9|Page
5.REDUCING PERSONAL LIABILITY

When you are Forming an LLC or LLC incorporation you create a separate person
from the one or ones who own it. Therefore, when Forming an LLC or your LLC
Incorporation is sued, there are provisions in the law to protect the owners
(members) and managers from personal liability. Once you do business with the
public or have even one employee, you are wide open to legal liability. Year after
year there are thousands of us who lose nearly everything we have due to personal
liability with our unincorporated businesses. In addition, once after LLC Formation
it is important that your business follows certain, relatively simple, formalities so
that it looks and acts like a separate legal entity. One can expand this liability
protection even further with a series LLC, which is one company with separate
liability cubby-holes.

10 | P a g e
6.FORMING AN LLC TAX ADVANTAGES

There are more tax deductions available after Forming an LLC than to businesses
that are not LLCs. A few examples of the benefits you can enjoy when you form a
Limited Liability Company include medical expenses, pension plan, business trips
and entertainment. It is reported the group with the highest percentage of tax audits
is the one that includes the Schedule “C” form filed by the self-employed. The
audit rate for the LLC Corporation is much lower than the self-employed. You may
own and be employed by your LLC Incorporation at time same time, thus,
eliminating the Schedule “C” self-employment return from your list of filed IRS
tax documents. The IRS seems to give preferential treatment after Forming an LLC
and LLC Formation with regard to tax deduction.

11 | P a g e
7.Deductible Employee Benefits

When you are Forming an LLC you can provide for a wide-array of tax deductions
for you and your employees. Even a one-person Forming an LLC or LLC
incorporation can enjoy tremendous tax-deductible benefits such as health
insurance deductions, travel deductions, automobile deductions, entertainment
deductions, recreational facilities and many more. One of the most beneficial
deductions is the pension plan or 401K. Money placed in a properly structured
pension plan is tax deductible and the funds grow tax-free for retirement. These
outstanding benefits alone can pay for Forming an LLC or your LLC Formation
many times over.

12 | P a g e
8.LLCs and Asset Protection

A lawsuit typically comes from one of two directions: business or personal. When
your business is sued – someone slipping and falling in your place of business,
getting into an automobile accident during working hours, for example – there are
provisions in the law so that either Forming an LLC or an LLC Corporation can
protect you from being sued personally. However, when you are sued personally –
getting into an automobile accident during non-working hours and getting sued for
more than your insurance coverage, for example, the Forming an LLC or LLC
Formation may provide better protection. A Forming an LLC has members. LLC
incorporation has shareholders. Corporate law allows your stock to be confiscated
in a personal lawsuit. In contrast, there are provisions in the law such that when
you are sued personally, your membership in your LLC may be protected from
being taken away from you. This is one reason why the Forming an LLC has
become the most popular choice for owing assets such as real estate.

13 | P a g e
9.LLCs and Anonymity
Owning an asset in your own name, such as a business, an investment property or
an automobile, provides an easy target for one performing an asset search. Before
initiating a lawsuit, it is quite common for an attorney to perform an asset search. If
no assets can be located in your name this may decrease the chance that litigation
will be pursued. Placing assets in the name of a LLC Formation and Limited
Liability Companies may provide a cloak of privacy between you and those
contemplating legal action against you. This privacy is enhanced when “nominee”
managers are listed. With the Companies Incorporated Nominee Privacy Service,
you retain ownership and control of your company. However, you elect Companies
Incorporated representatives (who have no control or ownership of your Forming
an LLC) to be listed in the public records.

14 | P a g e
9.Raising Capital
There is a greater source of capital available to LLC Corporation and LLC
Formation than to partnerships or proprietorships. Because Forming an LLC is
separate from the owners, people tend to be more willing to invest money without
accepting liability or responsibility for company business. The Forbes 400 list of
wealthiest Americans are full of individuals who hold the highest percentage of
their wealth through ownership of companies they or their family members started.
Many sole-proprietorship or partnership businesses are sold for one to two times
annual earnings. Whereas, many companies are valued at between 12 to 25 times
annual earnings or more.

15 | P a g e
10.Separate Legal Entity Status
Because you and your LLC incorporation are two separate legal entities, lawsuits
brought against your company do not need to affect you personally. When your
Limited Liability Company borrows money, there are measures such that you are
not personally liable to repay the debt. Forming an LLC remains after the life of
the owner(s). However, a sole proprietorship ceases to exist after the life of the
owner.

16 | P a g e
11.Broad Range of Powers

Forming an LLC may engage in any lawful activity, including, but not limited to
the following:

 Forming an LLC has the power to hold, purchase and convey real property
and personal property and to mortgage or lease any such real and personal
estate with its authorization. An LLC incorporation has the power to hold
real and personal property in any state, territory or country.

 Has the power to make contracts.

 May exist continuously, even after the death of the owner(s).

 Has the power to borrow money when necessary for the transaction of its
business, or for the exercise of its company rights, privileges or franchises,
or for any other lawful purpose of its formation.

 Forming an LLC and LLC Formation can issue bonds, promissory notes,
bills of exchange, debentures, and other obligations and evidences of
indebtedness, payable at a specified time or times, or payable upon the
happening of a specified event or events, whether secured by mortgage,
pledge or otherwise, or unsecured, for money borrowed, or in payment for
property purchased, or acquired, or for any other lawful object.

 LLC Corporation and LLC incorporation has the power to sue and be sued in
any court of law or equity.

 Has have power to appoint such officers and agents as the affairs of the
company shall require, and to allow them suitable compensation.

 Has the power to make an operating agreement not inconsistent with the
constitution or laws of the United States, or of the State in which the LLC is
formed, for the management, regulation and government of its affairs and
property, the transfer of its stock, the transaction of its business, and the
calling and holding of meetings of its stockholders.

 Has the power to wind up and dissolve itself, or be wound up or dissolved.

17 | P a g e
 Has the power to adopt and use a company seal or stamp, and alter the same
at pleasure.

 Has the power to guarantee, purchase, hold, sell, assign, transfer, mortgage,
pledge or otherwise dispose of the units of membership of, or any bonds,
securities or evidences of the indebtedness created by, any other company,
while owners of such units, bonds, securities or evidences of indebtedness,
to exercise all the rights, powers and privileges of ownership, including the
right to vote, if any.

 Has the power to purchase, hold, sell and transfer units of its own
membership, and use therefore its capital, capital surplus, surplus, or other
property or fund.

 Has the power to conduct business, have one or more offices, and hold,
purchase, mortgage and convey real and personal property in any of the
several states, territories, possessions and dependencies of the United States,
the District of Columbia, and any foreign countries as allowed by law.

 Has the power to do all and everything necessary and proper for the
accomplishment of the objects enumerated in its certificate or articles of
organization, or any amendment thereof, or necessary or incidental to the
protection and benefit of the LLC, and, in general, to carry on any lawful
business necessary or incidental to the attainment of the objects of the LLC,
whether or not such business is similar in nature to the objects set forth in
the certificate or articles of organization of the company, or any amendment
thereof.

 Has the power to make donations for the public welfare or for charitable,
scientific or educational purposes.

 Has the power to enter into partnerships, general or limited, or joint

ventures, in connection with any lawful activities, as may be allowed by law.

18 | P a g e
12.Separate Liability for Corporate Debts

Forming an LLC and LLC Formation are separate from those who own it. If the
company loses a lawsuit or has a debt it cannot pay, Forming an LLC or the LLC
Formation itself is responsible. The Limited Liability Company can provide a
strong shield to protect the personal assets of the members and managers. In
contrast, with a sole proprietorship or partnership, the owners can lose personal
assets in a business lawsuit. If the members and/or managers have personally
guaranteed corporate debts, of course, they can be held liable. In addition, Forming
an LLC must be established and operated properly for the legal shield to remain in
place. For maximum protection, it is legally prudent to treat the LLC Corporation
as a separate legal entity. For example, it is important to pay company expenses
with company money (or be sure the company promptly reimburses you for
business expenses if you have paid them personally). Conversely, you would not
pay your personal electric bill with company money. Instead, the company pays
you a salary from the company checking account (which is a tax-deduction for the
company). You deposit your salary check in to your personal checking account and
use those funds to pay your personal electrical bill.

19 | P a g e
13.CONCLUSION

Limited Liability Company is another category of company registered under the

Indian New Companies Act, 2013. There are numbers of companies are available
in India including private limited and public limited ones but Limited Liability
Company is a brand new one in the line. It's often called as a Limited Liability
Corporation and its nature of business is quite similar with partnership firm and
sole trade business. Company is an association of persons or an artificial person
formed under the Indian Companies act in order to carry out a certain business.
Under the Limited Liability Company Act, liability is limited among members or
partners and no one is responsible for other's misconduct and responsibilities in
any case. Limited liability company registration has been extensively growing due
to its many advantages over other form of business enterprises.

20 | P a g e
14.BIBILOGRAPHY

21 | P a g e