What is Limited Liability?
If you have ever looked into different business forms or gone looking for a venture capital loan, then you have undoubtedly come across the term “limited liability.” Perhaps you may not be completely sure what it means and what benefits it gives entrepreneurs. Here are some things about limited liability that you might want to know.
First, what is limited liability company? A limited liability company is an LLC (limited liability corporation), a corporation, or a partnership. In the United States, the laws regarding LLCs are somewhat different than corporations, which can be found separately from the state level. Most notably, an LLC is treated as a pass-through entity for taxes, although there are other differences between the two as well.
Limited liability companies are formed for a variety of reasons, such as to avoid paying taxes on personal assets, to avoid making personal loans, and to avoid making new business debt obligations. LLCs are also used in real estate transactions, especially to protect lenders against lawsuits on debts. When investors invest in one of these types of entities, they are generally investing in one member of the partnership. There is no domicile or legal residence of the entity, just the location where funds are located. It can be difficult to enforce debts owed to LLCs in the same way as debts owed to individuals, even if the members are US citizens.
Limited liability partnerships are formed in much the same way as LLCs are. The only difference is that the partners actually do not share in any of the ownership of the partnership’s assets, but are instead considered passive investors. Limited liability partnerships will create a new business entity and will be able to manage their own affairs as sole proprietors. They will make all of their own payments and will be responsible for their own taxes. Limited liability partnerships can also share joint-venture debts.
Partnerships in general share in the profits of the business, so the more partners there are, the larger the profits. Limited liability partnerships are created so that one owner maintains direct ownership in the partnership’s assets, while all owners are joint owners in the business. This means that each owner has the right to manage their own business as they see fit. Each owner may choose to invest in their own portion of the business, hire employees, buy supplies, etc…
With a partnership, there are two scenarios that can occur: there can be ownership by one partner and with no limit on ownership by others or unlimited ownership by all partners. Limited liability partnerships can be set up to allow an owner to have access to personal assets without limit. The personal assets of the partners can be invested in business operations to increase the value of the partnership and increase profits without any risk to the personal owner. The use of limited liability partnerships can decrease the taxes that need to be paid to the government because the personal assets will not be invested in the business.
In order to protect their own interests, creditors may sue the partnership for inability to pay debts. An owner who is personally liable for debts will personally be responsible for those debts. Creditors do not want to take on another person’s personal debt and, as much as possible, want to settle the debt with the owner. A limited liability company is set up to protect creditors by having the owners personally guarantee payments to them. This is good for the creditor because if the owner cannot make the payment for whatever reason, they still have assets to keep.
When setting up a business, it is always helpful to know what is limited liability company insurance, or LLC. The main purpose of this type of insurance is to limit personal liability of the owners of the company. By doing this, it is beneficial to both the company and the owners of the company.