Limited Liability of Shareholders in Business Studies, Study notes of Business Management and Analysis

Download Limited Liability of Shareholders in Business Studies and more Study notes Business Management and Analysis in PDF only on Docsity! Business Studies Notes 3 rd. Year Undergraduate / Graduate Level SUBJECT: The limited liability of shareholders Authors: (Original Study Notes and Lecture Notes prepared by Mr. K.P. Saluja (M.B.A. from Indian Institute of Management Ahmedabad), and by Mr. K. K. Prasad (M.B.A from IGNOU Delhi) These notes are intended to be used by undergraduate students, completing Year 3 Business Degree Courses. These notes will help undergraduates and graduates complete case studies, coursework assignments and pass exams in Business Studies and Economics. TABLE OF CONTENTS (1) Limited liability definition (2) How limited liability works (3) Limited liability in incorporated businesses (4) Types of limited liability (5) Characteristics of limited liability company (6) Types of limited liability company (7) Advantages of limited liability company (8) Disadvantages of limited liability company Limited liability definition Limited liability, conditions under which the losses that proprietors (investors) of a business firm might cause are restricted to how much capital put by them in the business and don't stretch out to their own resources. Acknowledgment of this guideline by business ventures and states was an essential figure the improvement of huge scope industry, since it empowered business worries to prepare a lot of capital from a wide assortment of financial backers who were naturally reluctant to with their whole private fortunes in their investments. Limited Liability Partnership An LLP (Limited Liability Partnership) has features of both a partnership and a company. As per regulations, two partners have to be there to register an LLP. An important feature is that the liability of the partners is limited to the extent of their contributions in the partnership. Private Limited Company Any business entity formed as per the regulations of the Companies Act 2013, where the shares are held privately and cannot be freely transferred to the public. A private limited company can have a maximum of 50 shareholders, while a minimum of 2 must be there at the time of incorporation. Public Limited Company It is a type of entity defined in the Companies Act 2013 as an entity whose shares can be held by the general public. The shares can be traded on stock exchanges or subscribed through Initial Public Offering (IPO). A public limited company is formed with a minimum of 7 shareholders. Characteristics of Limited Liability Company We either see sole proprietorship/partnership or corporation, but we don’t often come across with LLC. Because it’s a hybrid type, a combination of both, some of the characteristics LLC are as follows; Separate Legal Entity As a separate legal entity means that LLC is legally divided and separate from its owners. In simple words, LLC can run its business operations and carry on even if all the members have withdrawn from it. When then do, it would recruit and hire new people, buy and sell assets, and other stock of the company. In case of any misconduct, LLC would defend itself in the court of law. Protect Limited Liability One of the most popular characteristics of LLC is the limited liability of its members. If the company is involved in any kind of litigation or found guilty of bankruptcy, then its members don’t have to pay from their income and assets. Its members won’t be responsible for the company’s action. Banks and creditors can’t accuse its members of the company’s default and come after its members. LLC members will be liable and have to take responsibility for the misconduct and wrongdoings of other LLC members. It is not like a partnership, where every partner is liable for the actions of other partners. Flexible Taxation The characteristics of LLC that we have discussed so far provide the advantages of a corporation. Taxation is one of those things that don’t go well with corporations, because they have to pay double taxes. IRS doesn’t have a specific provision for the LLC, whether to tax like corporation or partnership. If you’re planning to tax like a partnership, then you have to pass the taxes through the personal tax return of its members. That’s how you would be able to avoid double taxes, because LLC doesn’t pay income taxes. Operation & Management Flexibility When we talk about the functionality of corporations, then there are so many formalities are involved like an annual board meeting, shareholders meetings, and other meetings where corporations are legally bound to record every minute of the meetings. The functionality of LLC is much simpler and easier where it doesn’t have to conduct meetings and record every minute of it. Management of record and other operations are also much simpler than the corporation. The roles of members are also flexible comprising of casual day to day activities. But it’s important to be familiar with the LLC laws of the country before starting it. Types of Limited Liability Company Some of the types of Limited Liability Company are as follows; Single Member LLC Single Member LLC, as the name implies, is comprised of only one member. However, the law doesn’t treat single-member LLC a separate legal entity. Therefore, its income has to pass through the tax return of its member for taxes. Apple started as a single-member LLC when Steve Jobs created the computer in his parents’ garage. Multi-member LLC Multi-member LLC is comprised of more than one member. Unlike single- member LLC, the law treats multi-member LLC a separate legal entity. Therefore, they can enjoy the advantages of corporations and partnerships. Facebook and Microsoft are the world’s leading tech companies, and they started as a multi-member LLC. Non-profit LLC As the name implies, such companies are not for profit. Therefore, they can enjoy the no tax benefits like churches and can have limited liability and Ownership Transfer It’s very difficult to transfer your ownership in LLC than corporations. That’s why people prefer corporations, where transferring ownership is much easier. Limited Life Factors like no board of directors and difficulty in transferring ownership make the life of LLC limited. References Akalp, Neil (August 10, 2016). "Should You Structure Your Accounting Firm as an LLC, PLLC or PC?" Accounting Today Source Media Bischoff, Bill (May 1, 2017). "The advantages of owning real estate in a single- member LLC" Market Watch, Inc Johnston, Kevin. "What Is the Difference Between Shareholders Vs. a LLC Member?" Hearst Newspapers, LLC Houston Chronicle Friedman, Scott E. (1996). Forming Your Own Limited Liability Company Dearborn Trade Publishing p 60 Macey, Jonathan R. (March 27, 2014). "The Three Justifications for Piercing the Corporate Veil" The Three Justifications for Piercing the Corporate Veil Klein, Shaun M. (1996). "Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd". Journal of Corporate Law 22: 131 Vandervoort, Jeffrey K. (2004). "Piercing the Veil of Limited Liability Companies: The Need for a Better Standard" DePaul Business and Commercial Law Journal 3: 51 Adkisson, Jay (April 30, 2013). "The Misunderstood Charging Order" Forbes See, e.g., "Delaware Code, Title 6, Chapter 18, Limited Liability Company Act" State of Delaware Retrieved October 9, 2019 Maynard, Therese H.; Warren, Dana M.; Trevino, Shannon (2018) Business Planning: Financing the Start-Up Business and Venture Capital Financing (3rd ed.). New York: Wolters Kluwer. p 137. Hamill, Susan P. (1998). "The Origins behind the Limited Liability Company" Ohio State Law Journal United States v. Kintner, 216 F.2d 418 (9th Cir. 1954) Field, Heather M. (January 2009). "Checking In on 'Check the Box'" Loyola of Los Angeles Law Review 42 (2): 451–528. Retrieved September 22, 2020 "LLCs: Is the Future Here? A History and Prognosis" www.americanbar.org. October 2004. Archived from the original on May 2, 2018 "Pros and Cons of a Limited Liability Company (LLC)" AllBusiness.com Retrieved October 9, 2019. Miller, Shari P. "Single Member LLC V/s. Sole Proprietorship Liability" Houston Chronicle Hearst Newspapers, LLC Retrieved October 9, 2019 "Gatz Properties, LLC v. Aurigae Capital Corp., 59 A. 3d 1206 (2012)" Google Scholar Falby, Bruce E. (August 22, 2013). "Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise". DLA Piper Bainbridge, Stephen (September 27, 2014). "Didn't sign your LLC operating agreement? Think that'll get you off? Think again". ProfessorBainbridge.com "Tax Advantages of Corporations – Updated for Tax Year 2016" TurboTax Avi-Yonah, Reuven S. (September 2004). "Corporations, Society, and the State: A Defense of the Corporate Tax". Virginia Law Review. 90 (5): 1193– 1255. Sim, Michael (2018). "Limited Liability and the Known Unknown" Duke Law Journal 68: 275–332. Hamill, Susan Pace (November 1996). "The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question". Michigan Law Review 95 (2): 393–446. "26 CFR § 1.704-1" Internal Revenue Service Legal Information Institute "26 CFR § 1.1361-1(c) (1) (B)" Internal Revenue Service Legal Information Institute "26 CFR § 1.1361-1(e) (3) (ii)" Internal Revenue Service Legal Information Institute "Determining an Individual's Tax Residency Status" Internal Revenue Service December 10, 2021.