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What Is a Limited Liability Company?

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Last editedJan 20212 min read

A limited liability company is a type of business structure which varies from other models due to the limitations it places on personal financial risk.

Other US business structures include sole proprietorship, partnership, and corporation. A limited liability company (LLC) and corporation are the only two that distance the owners from the debts and liabilities that a business may acquire.

It’s important to remember that an LLC is a business structure available only in the US. A direct limited liability company UK equivalent would be a private limited company.

Limited liability company definition

The US limited liability company definition is a business structure that blends the features of a corporation and a sole proprietorship. An LLC distances the owner from the debts or liabilities the company may acquire, but maintains a simpler structure than a corporation.

Regulations vary from state to state, but one key feature is that LLCs do not pay taxes, these are passed to their owners, known as members. A PLLC is the same structure, however it can only be formed by professionals such as lawyers, doctors, or architects.

Advantages of limited liability company

There are several advantages to the LLC structure:

  • Limits member’s personable accountability for liabilities and debts

  • Flow-through taxes mean they are distributed to members

  • Less complicated than a corporation

  • Almost anyone can be an owner

  • Flexible profit distribution

Limited liability company vs. private limited company UK

A private limited company is the closest UK equivalent to an LLC and enjoys the same protections. A private limited company needs to be registered with Companies House and have at least one shareholder. A Ltd exists as a separate entity to its owners, even directors are not considered solely responsible for the risks, debts, or liabilities of the business. For example, if someone raises a legal dispute, it’s the company and not the director who is sued.

What’s the difference between a private and public liability company?

Larger private limited companies may eventually grow to become chain businesses that then go public. This means it can sell shares to the public,  but in order to gain a trading certificate a company must have £50,000 in share capital. When a company goes public, it also increases its legal obligations, as its financial reports must also be made public.

Sole traders vs. limited company

Most private limited companies in the UK are small businesses. The other popular structure for small businesses is sole trader. Unlike a limited company, a sole trader is not seen as separate to the company. A sole trader does not even need a separate business bank account, which means their personal and business funds are fully intertwined. There is no limitation on the liabilities a sole trader may face.

A limited company also needs to be registered with Companies House, and complete the required paperwork. These aren’t steps a sole trader needs to take. Depending on the nature of the business, a sole trader model might be sufficient, such as a solo freelancer. A small business that is open to the public, like a food stall or small shop, or which hires employees, may prefer the protections that come with a limited company.

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