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What is the advantages and disadvantages of limited liability company in China

Each state has different rules governing the formation of a limited liability company. For instance, in North Dakota, a foreign LLC is not allowed for banking or farming. Some states will want a publication notice with the local newspaper that a company has been formed. Check with your local state office for further details.

This article should provide you with the basics of limited liability companies and help guide your decision of company business formation. Each state's laws differ as well as each company situation. It is advisable to seek tax and legal counsel to determine the best choice for your individual circumstance.

 

As a business owner, you will be faced with many important decisions, including what business structure to use in your company formation. While many countries allow the typical structures of sole-proprietorship, partnership, or corporation for business ownership, Americans have the ability to form a limited liability company.

What is a Limited Liability Company?

A limited liability company (LLC):

  • is a type of business ownership combining several features of corporation and partnership structures
  • is not a corporation or a partnership
  • may be called a limited liability corporation, the correct terminology is limited liability company
  • owners are called members not partners or shareholders
  • number of members are unlimited and may be individuals, corporations, or other LLC's

Advantages of Limited Liability Company

Limited Liability: Owners of a LLC have the liability protection of a corporation. A LLC exists as a separate entity much like a corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee.

Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.

No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.

Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Generally, this will be a tax advantage, but circumstances can favor a corporate tax structure.

Disadvantages of Limited Liability Company

Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy.

Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.

Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.

Setting-up a Limited Liability Company

All 50 states now allow the formation of LLC`s. Forming your own LLC may not be as simple as a sole-proprietorship, however, the process is much less than a corporation. There are two main actions:

1. Articles of Organization: If you plan to set up a limited liability company, you will have to file articles of organization with the Secretary of State and pay the required fees. Articles may be prepared by a lawyer or filed yourself.

2. Operating Agreement: Although it is not required in many states to draft an operating agreement, it is advisable. Much like corporate by-laws or partnership agreements, the operating agreement can help define your company profit sharing, ownership, responsibilities, and ownership changes.

Over the past fifteen years, limited liability companies have become one of the most popular ways for investors to structure their holdings, beating out limited partnerships. From families that pool their money together to Fortune 500 corporations that have subsidiaries, you may have directly or indirectly invested in an LLC without knowing it. This overview was designed to help you understand what LLCs are, why investors use them, and some of the factors you may want to take into consideration before you form an LLC or invest in one.

 

The Benefits of Limited Liability Companies

A limited liability company, or LLC as it is often known, is a type of business that combines the benefits of a corporation and a partnership. For example:

 

  • Taxation: An LLC can elect for either corporate-level taxation or pass-through taxation. That is, you can decide to have the company pay taxes on its earnings as a regular stock corporation would, or you can have it prepare K-1 statements for each investor showing their pro-rata portion of the profits and losses, which they then declare on their own personal income tax filings. In many cases, this can result in more profits flowing through to the owners because those in lower tax brackets pay less to the government than they otherwise would and the avoidance of double taxation on dividends.
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  • Member vs. Manager Operation: Instead of shareholders, LLCs have “members”. An LLC can be either “member managed” or “manager managed”. In a member managed limited liability company, all owners have a say in day-to-day decisions. In a manager managed limited liability company, the members elect managers to run the business and these managers handle the daily work, often for salary and wages.
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  • Tremendous Flexibility for Profit and Loss Allocation: Profits and losses can be divided virtually any way that is compatible with tax law, unlike with a corporation where everything has to be divided pro-rata. If you and your family formed an LLC to start a restaurant, you could write the contract that governed the business (known as the “operating agreement”) to meet your needs no matter how complex; e.g., certain family members who only owned 2% of the business could be paid a percentage of sales plus no losses would count against their stake. In a stock corporation, if you own 2% of a company, you have to take 2% of all profits and all loses, giving you much less flexibility.
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  • Limited Liability for All Investors, Including Managers: Unlike a limited partnership, where the managers, or general partners, have personal liability for the business debts and liabilities, in a limited liability company, no one is personally on the hook unless they agree to be in a contract, such as a commercial bank loan that requires a personal guarantee. (If investors in an LLC don’t keep enough distance, courts have allowed investors to become personally liable because they “pierced the corporate veil”.)
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  • LLCs Have Far Fewer Meeting and Paperwork Requirements: A stock corporation is generally required to file regular paperwork with the state in which the business is formed, as well as publish annual reports, have regular board of directors meetings, and much more. A limited liability company, on the other hand, requires virtually no upkeep. Meetings can be as formal or informal as you wish, as long as everything is properly documented and you don’t treat the business as an extension of your personal assets.
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  • Cheap Formation Costs: Limited liability companies can be established for very little money. For simple LLCs among family members, this can require only a few hundred dollars. In fact, you can even use one of several online legal services to file your paperwork, provide fill-in-the-blank operating agreements, blank limited liability company membership certificates, embossed binder, LLC seals, and more.
 

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