Limited Liability Company

This article focuses on the working and functioning of a Limited Liability Company. The Article also distinguishes between LLCs, Sole-proprietorship, a partnership and a corporation. The article goes on to elaborate meaning, types, features, merits demerits, procedure of registration of such LLCs. The less discussed concept of Unlimited Liability LLCs is also dealt with by the author.
Estimated Reading Time: 10 minutes

Introduction

For any business, there can be various forms depending on the objective, size, basis of control, etc. – one such form is a Limited Liability Company (the ‘LLC’). However, the concept of LLC doesn’t exist under the Companies Act, 2013. LLC is often interchanged to mean a company that is limited by shares. In this article, we shall try to elucidate the meaning of Limited Liability Company with respect to the company which is limited by shares as prescribed under the Companies Act, 2013. A Limited Liability Company is a business structure in the corporate world with combined features of a sole-proprietorship or a partnership and a corporation. It has the best features of all the forms, thereby becoming the preferred choice of investors while opening a new business. An LLC is not a corporation entirely as its identity is dependent on its members. Yet, unlike a partnership, it protects the investors from any personal liability in case of losses faced by the company. Therefore, they are named as LLC. An LLC is a separate entity from its shareholders wherein they are liable only to the extent of their contribution to the share capital of the company. An LLC can be formed with only two shareholders. They can be natural persons or artificial. An LLC, further, must have at least two directors at all times who may be the citizens of any country. The LLC must have a registered office address in India; it may or may not be the principal office for the LLC. It has similar compliances, like a company, for having meetings, filing returns, maintaining registers under the Companies Act, 2013. For example, if an LLC is sued in a court of law, its members (shareholders) will not have any personal liability for the debts/losses. Only the company is liable to borne the liability arising out of such a judgment.

Meaning of Limited Liability

Limited liability, as is apparent from the term, means that the financial liability of the investor is limited to the extent of the fixed amount that he has invested in the company. In other words, an individual cannot be made personally liable for the debts, losses or liabilities of a company. The matter of liability generally comes up during the winding up of the company. In an LLC, the liability of an investor shall only be up till the realisation of the amount unpaid by him on the pre-agreed contribution for the shares of the company. It is in contrast to the liability of sole proprietors and general partnerships where the liability of the office bearers is unlimited i.e. their personal assets may be attached for the losses and debts of the company.

The office bearers of an LLC are usually the shareholders themselves. In their role as an office bearer, a Director of the company, the liability shall be unlimited including the penal liability in cases of non-compliance of the law.

Types of Limited Liability Company

In India, there are two types of limited liability companies-

  1. Public LLC- A public limited company is a company limited by shares. Herein, there is no limitation on the number of shareholders, transfer of shares and public deposits. The liability of each member is limited by the amount of share which he holds. In a public company, there needs to be a minimum of seven shareholders at all times. It must have at least three directors. It must publish a prospectus before it begins its transactions as a company. Unlike a private company, it cannot start functioning right after incorporation. It must first reach the specific capital subscription.
  • Private LLC- A private limited company is also limited by shares with a maximum limit of 200 shareholders. The main difference between a public and a private company is that a private company cannot make a public offer regarding its shares and debentures. The company cannot accept deposits from the public at large. There must be two shareholders at all times for a private. One of the essential factors which differentiate the two is the incapacity of the shares of a private company to be listed on the public stock exchanges.

Main Reasons for Preferring an Limited Liability Company

When a person decides to open a new corporate business, it is purely his choice to choose the format for his investment. A business may be operated through various modes, some of which are discussed below-

  • Sole – Proprietorship – It is the simplest form of existence for a business entity. It has a single owner. The person should possess a social security number/ PAN/or the necessary permit/licence, if any before commencing the business. It is economical and preferred for small businesses. Since only one person is conducting the business, the law makes no distinction between the individual and the business.
  • Partnership – This business formation comes into existence with an agreement between two or more people to operate business collectively on the terms and conditions as agreed via the agreement. It is also a cost-friendly method and convenient for the capital generation as more than one person can contribute to capital generation. Even here, the business has no separate existence of its own. Every member is responsible for the losses and liabilities of the company jointly and severally to the extent of full realisation.
  • Company – If a company is registered under law; it becomes the most flexible business entity. A company is considered as a separate entity under law, the members are protected from personal liability and are liable only to the amount of capital paid by them. The ownership here is transferrable like a movable property through stock exchanges.
  • LLC – An LLC is a form f company and has similar incorporation procedure and rights. It may be owned by individuals, corporations, trusts or partnerships. The main feature of an LLC is the limited liability of the members with regards to the share capital of the company and is also known as a ‘Company Limited by Shares.’
Also Read  Transfer Of Securities

Advantages

Depending on the period of investment, type of business, number of members involved etc., the choice for the format of investment is made. Generally, people choose an LLC over other formats for the following reasons –

  • LLCs allow an investor to protect one’s personal assets. They enjoy protection against liability from the losses of the company or its debts. Therefore, their assets are safe from recovery in case of the company going into losses.
  • Even otherwise, the personal liability of any shareholder or an office bearer is extremely restricted. For example, if a company gets into a legal scuffle, the member and officers are protected from being personally involved in their personal capacity in most cases.
  • It enjoys a separate legal status differentiated from its members and shareholders. It can sue and be sued in its own name; it is capable of owning and transferring property and funds, etc.
  • It has better credibility and faith for customers and the money lenders as their payments and rights are secured through law. There is also a general assumption that a company has long term business plans whereas a sole proprietorship or partnership generally is less reliable.
  • A Company needs to be registered. This assures that no other person can register a same or a deceptively similar name for his business.
  • It is beneficial from the viewpoint of tax purposes as well. The companies are allowed more deductions from their profits while calculating the taxable income than any other entity.
  • It becomes easy for an LLC to raise capital for the business. Since an LLC is more reliable, it becomes easier for the company to raise funds through various means.
  • It does not die with the death of the owner, rather has a perpetual existence under a common seal, of the company.
  • The shares of a company are considered as movable property as per law and can be transferred from one person to another.
  • The laws for Companies and LLC are stringent and more comprehensive. It, therefore, provides for an opportunity of transparency in working, good governance internally thus benefitting all the stakeholders.

Disadvantages

The following are some of the apparent disadvantages of an LLC-

  • The LLCs have to adhere to several compliances of meetings, maintaining registers, recording the minutes of its meetings etc. in contrast to a partnership.
  • The details of an LLC, if private, are available in the public domain and open for inspection at all times.
  • There are several directors and managers in a (public) LLC. Deci­sions are to be taken in meetings of the Board of directors and this can sometimes cause a delay.

Procedure of Registration of Companies

For registration of a Limited Liability Company, the guiding law is the Companies Act, 2013, and the Companies (Incorporation) Rules, 2014. The company needs to firstly decide on a name and prepare the incorporation documents with the Ministry of Corporate Affairs (the ‘MCA’). MCA provides web service for reserving a name for a new company or for change of name for any existing company which is known as RUN (Reserve Unique Name) web service. With the aim of doing business with ease MCA has initiated an E Form SPICe (INC-32) which deals with the single application for reservation of name, incorporation of a new company and/or application for allotment of DIN and/or application for PAN and TAN. This eForm is accompanied by supporting documents including details of Directors & subscribers, Memorandum of Association (MOA) and Article of Association (AOA). Once the eForm is processed and found complete, company would be registered and CIN would be allocated. DINs also get issued to the proposed Directors who do not have a valid DIN.

Also Read  Transfer Of Securities

For registration, there must be at least two members both having the Director’s Identification Number (DIN) and the Digital Signature Certificate (DSC). An application needs to be made for approval of the name of the firm. After the approval of the name, all other information about the said business like its head office, name and details of members, the agreement that governs the LLC etc. are to be filled. Further the following documents, namely-

  • INC-9 – Declaration by first Subscriber(s) and Director(s);
  • DIR-2- Declaration from first Directors along with Copy of Proof of Identity and residential address;
  •  NOC from the owner of the property
  •  Proof of Office address (Conveyance/ Lease deed/ Rent Agreement etc. along with rent receipts);
  • Copy of the utility bills, (not be older than two months);
  •  In case of subscribers/ Director does not have a DIN, it is mandatory to attach: Proof of identity and residential address of the subscribers.

Once all the above mentioned documents are available, filling of the eform should be done as it acts a single window for incorporation of company.

After proper filing of SPICE form applicant has to fill the e-form INC-33 (MOA) and INC-34 (AOA). Once all the forms are uploaded on the MCA website and registration payment is made, the Certificate of Incorporation shall be generated with Corporate Identity Number which (CIN) and Tax Deduction and Collection Account Number (TAN).

Unlimited Company

Unlimited liability, as the term suggests, refers to a business model where the obligations of the member, financial and legal, are unlimited. It means that the members make themselves personally liable for the losses of the business. If there is any liability which cannot be relieved by the business, personal assets of members can be used for relieving such liability. Such companies may or may not have share capital. They may be either a public company or a private company. . The members is liable to the company and to any other person

Following are the main differences between a limited and unlimited company from a business point of view-

  • An LLC is a business structure where there is protection to the personal assets of members. They are only liable to pay up a certain amount that one has undertaken to pay. More than that, a person is not liable irrespective of the losses of the company or any third person investing in the company. In an unlimited company, the owners face unlimited liability for any risk which may arise in the business. If the assets of the business are not enough to pay off liability of the company, the members might be asked to contribute to the loss from their personal assets.
  • Limited liability is generally preferred by an investor as it affords protection to his personal assets whereas the unlimited company is generally preferred by a creditor as there is a better assurance of the return of his capital.

Conclusion

There are different types of businesses that people undertake and for each business, there is a different kind of format that could be suitable for that particular business. For a large business Public companies or LLC are formed. It is a more preferred choice mainly because of the protection it affords to the persons investing in the business. People are motivated to invest in LLCs because of a limited risk factor. This form of business is also good for non-businessmen who are willing and have enough money to invest in the shares of a specific company and is also a viable process for economic development in a developing country. An LLC reserves an option of being a listed public company where its shares can be traded in a stock exchange like a movable property. Therefore, it also ensures an inflow of capital in a poor market like ours. LLC or a company limited by shares is a preferred choice for bigger businesses as it is more reliable and has a better system for accountability, transparency and reliability.

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