The correct choice of business entity is one of the crucial decisions facing people in the world. There exist many entities to choose from. They include sole proprietorship, partnership, corporations, cooperatives and others. Each of these business entities is appropriate for a particular business hence making the right choice on the entity which is most suitable for a certain business becomes more complex. The main purpose of this essay is to describe Limited Liability Company as the best business entity as compared to Limited Partnership, Limited Liability Partnership, Sole proprietorship, Corporation, C-Corp, S-Corp and a Closed Corp.
Limited Liability Company vs. Sole proprietorship
The limited liability company has legal protection to its owners against the law unlike sole proprietorship which has no separation between the sole owner and the business itself. This implies that in cases where the business is sued, the business owner’s personal assets are used during the judgment against the business. The LLC is a separate entity from the owners and therefore only the owners’ assets are not used to pay for the company’s bad debts. Also, the LLC can access credit from different financial institutions with much easy as opposed to sole proprietorship where credit is given depending on the owner’s assets security (Thompson B, Pg.1)
Limited Liability Company (LLC) vs. Limited Partnership
LLC offers absolute limited liability to its members while in a limited partnership, one partner has liability exposure. Limited Liability Company members have no personal liability. Members of a LLC participate in management process without risking the status of limited liability whereas a limited partner loses his limited liability status in case he/she is involved in daily management of the business. Also, a member of a LLC who is self employed may be exempted from self employment taxes if he/she does not get involved in the company’s management unlike the Limited partner (Paul S. Pg.1).
Limited Liability Company (LLC) vs. Limited Liability Partnership
The limited liability partnership (LLP) has similar features as those for the limited liability company (LLC) but there is a critical difference between them that makes the LLP not a suitable choice for ordinary an ordinary businessman. The LLP is made up of professional firms only (Should your small business be a limited liability company? 2010).
Limited Liability Company vs. Corporation
In the LLC, all the business profits, losses and expenses flow through the company to the individual members. This helps members in avoiding the double taxation of paying corporate tax plus individual tax. This will be an advantage to LLC and it does not favor the corporation. Also, corporations are always required hold meetings and keep formal minutes.
While the LLC requires no corporate minutes and is easier to operate. The LLC is better because it is formed by members who invent an operating agreement which runs the business without the structural guidelines usually imposed on corporations. This allows for flexibility without any formality such as meetings of Board of Directors, which are found in corporations (Gass D, 2010)
Limited Liability Company vs. S-Corporation
For the S corporations, the distribution of the net distributable profit follows a rigid way which is usually based on the percentage of the ownership unlike in the LLC where the net distributable share of the profits and losses is not dictated by percentage of the ownership. Also the S Corporations are required to hold a series of meeting and keep the necessary meeting minutes which are not required in the LLC.
When a crisis arises, the LLC’s are dissolved easily without much effort. The number of the members of an LLC is always unlimited and they may comprise of individuals, the corporations or other LLCs. Another main advantage the LLC over an S- corporation is regarding citizenship for example in United States. Its structure dictates that every shareholder must be a legal U.S. resident or citizen. This is a serious formality because when one of the shareholders passes away and leaves all the shares to a non U.S. citizen, the corporation automatically loses its corporate status and may close down (Gordon G. 2010).
Limited Liability Company vs. C-Corporation
The LLC usually enjoys most of the similar advantages of the C-corporation and it retains the same characteristics of the unincorporated business entities such as partnerships and sole proprietorship. Similar to the C- corporation, the limited liability company offers limited liability to its members i.e. the member is only liable only to particular amount he/she has contributed to the LLC. As in partnership, the LLC’s earnings are always not subject to an entity level of tax while the C-corporation imposes a double level of tax on the distributable income. Like the shareholders of a C-corporation, the members of the LLC are not liable for debts of the business beyond their investment level. The owners can be able to operate the business with the security of knowing that their assets are protected from the business entity’s creditors. There are some exceptions, such as an instance when an individual owner guarantees the liabilities that are incurred by the LLC (Dickson F.2010).
Limited Liability Company vs. Closed-Corporation
In LLC the Profits and losses are allotted directly to the Members or owners in the proportion which is determined by members. This does not apply to the closed corporations (Beatty F. and Samuelson S. Pg.445).
General benefits/advantages and disadvantage of LLC over other entities
The LLC posses the following benefit that make it the most suitable business entity to be chosen. Formation, only two documents are needed to form an LLC; a charter and an operational agreement. Limited liability, members are not personally liable for company debts but only risk their investments. Tax status, at LLC they avoid double taxation as income flows through the company then to the individuals. Flexibility, unlike other corporations, LLC members can be from corporations, nonresidents or partnerships. The current laws state that the duration of an LLC is to be continued even if one of the members withdraws or dies. All this advantages of an LLC make it the best entity to form a business (Beatty F. & Samuelson S. Pgs. 445-447)
Business people are supposed to choose the limited liability company as a suitable business entity if at all they require safeguarding their personal assets such as bank accounts, investments and even real estates. When the LLC which complies with the required legal structure is formed, it assist the members in conducting healthy and free businesses which are not prone to many formalities. This is possible because the LLC reduces the member’s personal liability, helps in tax saving, improves the credibility of the member, ensures the required continuity and it attracts the potential investors.