The Advantages of Private Limited Company

Are you starting a new business and not sure which entity to use? Are you concerned about personal liability but don't want to pay higher taxes? A private limited company might be the best choice. A limited liability company is a hybrid business entity that combines the advantages of a corporation and a sole proprietorship.

Limitation of Personal Liability

The owner of a sole proprietorship is personally liable for all the debts of the business. He is also at personal risk of judgments and lawsuits. A sole proprietor could potentially lose his house, cars, bank savings accounts and other personal assets.

With an LLC, an owner does not have this risk of personal liability. An LLC is a legally separate entity from its owners. It is solely responsible for its own debts and legal contractions. This means the personal assets of the owners are protected if an employee, a business partner or the company itself is sued for negligence. This is especially important for owners with significant amounts of personal assets that they do not want to risk.

Significantly Less Paperwork

While corporations do provide legal protection for their owners, they also require more record-keeping and paperwork. Corporations must file annual reports, hold annual stockholder meetings and keep more records. While an LLC must file an operating agreement with the state, it is not required to hold annual meetings or provide annual reports.

Pass-Through Tax Advantages

The IRS automatically considers LLCs as pass-through entities for tax purposes. The owners report the profits and losses of the business on their personal tax returns. This generally results in lower taxes compared to a corporation. In contrast, a C Corporation faces double taxation. Its profits are taxed first at corporate rates, and then the owners must pay taxes on any distributions they receive.

Types of Owners

Owners can avoid the double taxes of a corporation by declaring the entity an S Corporation for tax purposes. However, an S Corp has restrictions on the number and types of owners it can have. An LLC has no limitations on the number of owners, and it can also accept all forms of owners, such as corporations, partnerships and other limited liability companies.

Flexible Management Structure

Corporations have a formal management structure. They have a board of directors to oversee corporate policies and to appoint officers to manage the daily operations of the business. LLCs are not required to have a rigid structure. And, they have more flexibility about who and how they make decisions and run their businesses.

Distributions of Profits

LLCs can decide how they distribute profits to their owners. Unlike corporations, they are not required to share profits equally to shareholders. An LLC could distribute a larger share of profits to an owner because he or she contributed more in labor or money to the business.

An LLC is a flexible form of business entity that offers many advantages. It limits the personal liabilities of the owners, doesn't require a lot of record-keeping, avoids double taxation and gives the owners plenty of options for a management structure that fits their situations.