Forms of Business Organizations : Limited Liability Companies

Limited Liability companies are a form of organizations where there is a legal existence for the entity which separated from owners of the business. Owners of a limited liability firm are called shareholders as they contribute to the capital by means of purchasing shares. Minimum number of people required to open up a limited liability company differs from country to country where as the maximum number of contributers is generally unlimited. In a limited liability company there is a concept called Veil of Incorporation where it gives a legal existence to the firm separating it from the owners of the the company. Since the legal identity is present it gives rise to perpetual succession where the company proceeds its business even though owners leave the business. Additionally due to legal existence shareholder’s liability towards debts incurred by company is limited to share capital even though company as a legal entity is unlimitedly liable to pay its debts. Since there are many owners of the firm management team is appointed to manage the business where it gives rise to Stewardship Function of Board of Directors.

Limited Liability companies have following advantages:

  • Limited liability borne by the owners towards its debts.
  • Since there is legal existence company can enter into contracts on its own.
  • Perpetual Succession is present even if the owners leave the firm.
  • Management team employed to manage the business possesses specialized skills in management resulting in better management.
  • Ability to raise huge capital as there is no maximum number of shareholders.
  • Loses are born by all shareholders collectively.
  • It provides everyone the opportunity to become an owner of a business at least in small scale.
  • Owners can transfer their shares to any person they wish at anytime.

Limited Liability companies have following disadvantages:

  • Difficulty in managing large number of shareholders.
  • Owners lose the control over day to day business operations of the firm as the management team appointed.
  • There can frauds as third party is managing business.
  • Entity is liable for corporate tax and owners are liable for income tax on dividends received.
  • Registration process requires time and money.
  • Highly regulated reporting requirements are present.
  • Profits will be distributed as dividend only if the management wishes to do it.

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