Polytechnic University of the Philippines 1

The Limited Liability Company (LLC) defines as a business structure where

the owner insulates its personal assets and the business financial liabilities. This

business structure guarantees the owners, usually called members, to protect their

personal assets when bankruptcy or other circumstances happen to the entity. It

also provides a flexible taxation, Limited Liability Company members are not

required to pay their taxes themselves, instead it pays the business taxes through

the members personal tax return──this is called pass-through taxation. This

structure is a combination of the pass-through taxation of a partnership and the

asset protection of corporation.

According to IncNow (2018) in the article entitled “The History of LLCs”, the

Limited Liability Company, a business structure, was invented in the state of

Wyoming in the year 1977 because the corporation has a strict rules and formalities

with bureaucracy including stockholders, directors, officers and annual meetings so

it is hard to operate. As the modernization continues, the people and government

created an easier and more flexible form of business that can also provide a

protection to their personal assets which is similar to the characteristic of a

corporation. However, most other states did not follow this suit until the year of

1990’s. The Delaware waited until 1991 to be able to create their own Limited

Liability Company (LLC) law.

In today’s generation, more businesses are encouraged to start a business

using the LLC structure because it is much easier to set up than a corporation with

protection to the personal assets and tax advantages.

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Limited Liability Corporation enables the organization to have a similar

constrained risk assurance as a company, and the operational adaptability that an

association has. Sole proprietorship is the least demanding and most financially

savvy sort of business to shape and operate.

Differences in Liability Protection

The greatest difference between a sole proprietorship and an LLC is the

issue of restricted obligation protection. Sole owners have boundless risk for

business obligations, claims and different business-related commitments. This

implies sole owners are held by and by at risk for all obligations caused while

working the business. In the event that the advantages of a sole ownership are

insufficient to meet the organizations’ obligations, loan bosses may pursue a sole

owner's close to home resources for fulfill the commitment.

Working as an LLC furnishes the proprietors of the organization with restricted risk

assurance against organization obligations and commitments. Leasers and

gatherings that start a claim against a LLC can not pursue a proprietor's close to

home resources as remuneration for business-related obligations.

Differences in Owner Control

Sole owners have full authority over the business, including how the

organization utilizes its returns. In a sole proprietorship, there are no different

organizations or people to impart business thoughts to. The sole owner alone

should settle on each choice with respect to how to work the organization, and

utilize the organization's assets.

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LLCs with more than one proprietor have different individuals and

administrators to give input in regards to how to deal with the business.

Furthermore, proprietors of a LLC can decide to enlist outside people to deal with

the organization, rather than taking care of the organization's everyday issues.

Ease of Raising Money

Sole proprietorships have more trouble fund-raising than a LLC. First of all,

a sole proprietorship might be seen as having less validity, since the entrepreneur

didn't take the time or pay the cost to join or frame a LLC. Absence of validity makes

it harder for a sole ownership to get advances, and could constrain the entrepreneur

to depend on business resources and individual record of loan repayment to raise

assets for the business.

LLCs may offer possession enthusiasm for the business in return for cash

which will help financial the organization's development. At the point when a sole

owner offers possession in the business to another business or individual, the

organization will no longer be treated as a sole ownership.

Number of Owners

A business can have just a single individual going about as the

organization's proprietor so as to win treatment as a sole proprietorship. Another

business, trust or domain may pass on responsibility for sole ownership. On the

other hand, a LLC may have a boundless number of proprietors that may comprise

of outside organizations, enterprises, different LLCs and associations.

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Compared to sole proprietorships

Compared to sole proprietorships and partnerships, the LLC has the most

advantages when compared to a sole proprietorship or partnership. However, not all

businesses are at a stage when an LLC makes good business sense.

Compared to corporations

LLCs are similar to corporations in that they offer limited liability protection

to its owners. LLCs also have fewer corporate formalities and greater tax flexibility.

However, one of the disadvantages is that profits may be subject to self-

employment taxes.

Compared to limited partnerships.

LLCs offer liability protection to all the members of the company, unlike a

limited partnership, which only provides liability protection to limited partners.

Advantages of an LLC

Fewer corporate formalities. Corporations must hold regular meetings of the

board of directors and shareholders, keep written corporate minutes and file annual

reports with the state. While, the members and managers of an LLC need not hold

regular meetings, which reduce complications and paperwork. In a corporation,

improper procedures may allow a creditor to pierce the corporate veil and hold

shareholders liable.

Tax flexibility. By default, an LLC is treated as a "pass-through" entity for

tax purposes, much like a sole proprietorship or partnership. This means that LLCs
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avoid double taxation. However, an LLC can also elect to be treated like a

corporation for tax purposes, whether as a C corporation or an S corporation. (The

C corporation is the standard (or default) corporation under IRS rules and S

corporation is a corporation that has elected a special tax status with the IRS and

therefore has some tax advantages)

Special profit allocations. An LLC can make special allocations of profits

and losses among members, whereas S corporations cannot. S corporations must

have one class of ownership in which profits and losses are allocated according to

the percentage of ownership.

Property contributions. Contributing property to set up an LLC is not

taxable, even for minority interest owners; whereas for a corporation, the Internal

Revenue Code (IRC) only allows it to be tax free for the contributors who have

control of the business.

No ownership restrictions. An LLC may have an unlimited number of

members, whereas an S corporation is limited to one hundred. The owners of an

LLC can be foreign persons, other corporations, or any kind of trust, but the owners

of corporations cannot be.

Ability to use the cash method of accounting. Most limited liability

companies can use the cash method of accounting. This means income is not

earned until it is received. On the other hand, C corporations often must use the

accrual method of accounting.

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Ability to deduct losses. Members who are active participants in the LLC's

business can deduct its operating losses against the member's regular income to

the extent permitted by law. Shareholders of an S corporation are also able to

deduct operating losses, but shareholders of a C corporation are not.

Ability to place membership interests in a living trust. Members of an LLC

are free to place their membership interests in a living trust. In the case of an S

corporation, placing shares in a trust can raise issues with the S corporation status.

The purpose of an LLC is to allow one or more people to operate a

business and have liability protection along with certain tax advantages. Another

purpose of an LLC is to give business owners an entity that is flexible and easy to

maintain, while requiring fewer formalities than other business entities, such as

corporations.

Simplified Set-up

Among all forms of companies, setting up an LLC is a relatively easier with

lesser complexities, paper works and costs. Most business require an obtain copy

of Articles of Organization form which will help you to find out specific rules

regarding the business. The document includes basic information like business

name, address, and the members. When setting up an LLC, choosing a name for

the business is a must and it should not be the same on the LLC on file in the state

which you are filing. The filing is done with the Secretary of State for most states

and has an associated filling fee. Next comes creating an Operating Agreement

which though is not mandatory in most states but is recommended especially for

multi-member LLCs.
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Liability Protection

Only the LLC is liable for the debts incurred by the business-not the owners

or managers. This general means that the member’s liabilities for the debts and

obligations of the LLC are limited to the amount that the owner has invested in the

company. For some instances, if your company gets sued, your personal assets like

bank accounts and real estate will remain safe and protected. LLC has a kind of

structure that provides liability protection for the managers and members and

protects the personal assets of the owners from business liability.

Maintenance

Regular meetings of the members, managers, and/or board of directors are

technically not required by law in LLC. Minutes of the meeting take place at least

annually to ensure that company formalities are being allowed and several key

issues are being discussed.

Tax Advantages

Another important purpose of an LLC is to efficiently move income from the

business to the members, while avoiding any unnecessary taxes. This means that

LLC owners don’t have to file a corporate tax return. An owner simply reports their

share of profit and loss on their individual tax return; business doesn’t pay for taxes,

only the owner. This is one of the most significant benefits of an LLC because it

prevents double taxation. Benefits of Limited Liability Company

Business owners take unnecessary personal risk if they run their business

as a sole proprietor. In sole proprietorship, the law does not differentiate between

personal assets of the owner and the business assets. If the company didn't have
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enough money to satisfy the judgment, the business owner could be legally forced

to do things like remortgage their home, sell properties and could use personal

funds. Over many years the fruits of hard work by the business owner will evaporate

overnight.

One of the greatest benefits of structuring the corporation as a limited

liability company is that it reduces your shareholders ' liability. The corporation

becomes a separate legal individual, the only person to be liable for their own debts

and obligations. In other words, the company's liabilities are isolated from its

individual shareholders and thus do not endanger any shareholder's personal

assets. Only a creditor can attack a shareholder's assets that they invested in the

business.

Limited liability encourages entrepreneurial conduct by empowering

companies to make individual merit business decisions without losing personal

assets. Business owners are more likely to take considered business risks if they

believe their personal assets will remain secure regardless of how their business is

good.

1. Sharing Ownership

In a partnership or sole proprietorship, the process of reassigning the

ownership of parts of the business is cumbersome, time-consuming and expensive.

In most cases, without the written consent of all partners, a partner cannot transfer

his or her stake in the business to another partner. The relationship may have to be

dissolved if a partner decides to end his or her engagement in the partnership

without receiving this consent.

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2. Easier Access to Capital

The consequence of limited liability is that it requires the company to be

owned by other shareholders. This makes a company more attractive to investors

because incorporation restricts liability to the sum these investors bring into the

business. A sole proprietorship or partnership is not the case. One factor investors

like companies is because they allow different stock categories. A capitalist

enterprise that invests in your company would expect preferred stock, as opposed

to common stock. A common key difference is that preferred stock is returning its

investment to common stock.

3. Tax Benefits

Incorporating the company would reduce the taxes, making the business

"take home" more profitable. Depending on the personal income class of the owner,

sole proprietorship and partnerships are treated as if the earnings of the company

were the wages of the owner. Companies are considered separate legal entities,

companies are taxed at the corporate rate. The corporate tax rate varies depending

on where the business is located. In many countries including Singapore, corporate

tax rate is lower than the personal income tax rate. Companies are considered

separate legal entities; corporations are taxed at the level of the corporation.

4. Professional Image

By forming a corporation, a professional identity has been developed. This

increases trust with consumers and distributors as it transmits authenticity,

authority, and longevity. It helps the business engages in marketing activities and

seeks to establish itself as a brand in the consumer consciousness, as well as

increasing revenue. Incorporating has a positive impact on a founding team's self-

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image. Also, it signals the beginning of a new era in business life as it shifts from

vague idea to tangible reality. This can give them the confidence they need to

continue to push forward with business growth.

5. Perpetual Existence

Corporations exist independently of their founders and remain in existence

forever regardless of the fate of individual directors or investors. The only way the

company can cease to exist is when it is determined to be dissolved by the directors

and investors.
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IncNow. (January 18, 2018).The History of LLCs. Retrieved from

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Jeffrey Joyner (n.d.). Sole Proprietorship Vs. Limited Liability Company. Retrieved

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https/en.m.wikipedia.org/wiki/Limited_liability

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