Limited Liability Company – Advantages and Disadvantages

Last modified on November 16th, 2018 at 3:50 pm

7 min read

limited liability company

There are three types of limited liability companies (or LLC) in India, One Person Company (OPC), a private limited company and a public limited company. The word LLC is usually not used in India as it is more of an American term. The concept of Limited Liability Partnership (LLP) has come up in the last few years. This is not a company but a type of partnership where, as the name suggests, the liability of the partners is limited. Nonetheless, it is treated as a corporate body under the Indian Law and like a company has a separate legal existence from its partners.

 

As with any type of business whether a limited company, OPC, private or public company, they all come with their own unique advantages and disadvantages. In this post, we look at some of these pros and cons.

 

Advantages of a Limited Company

 1. Separate and Independent Legal Entity

A company has a separate, independent and legal existence from its shareholders. This means that it has an identity of its own and can work independently, accumulate assets and take on debt under its own name. It can even own immovable property like real estate or buildings.

This is the most fundamental characteristic of a company and because of this, it is treated as an independent person in the eyes of the law. It can even own shares of another company.

 

2. Limited Liability

The shareholders have limited liability in case the company is sued for any debts or other encumbrances. The shareholder’s liability is limited to the amount unpaid on his or her shares.

Let us understand this with an example. Suppose, the shareholder has 100 shares of Rs. 10 each of which Rs. 8 has been paid up and the remaining Rs. 2 per share has to be paid. In case any liability requires the shareholders to pay, then our shareholder will only have to pay up to Rs. 200 (Rs. 2 each for 100 shares) and nothing more.

 

3. Equal Rights of Ownership

The total ownership of the company is denoted by its share capital. This is divided into a number of shares, each with equal nominal value. Each of these shares offers an equal right of ownership. This means any two people, say the promoter of the company and an independent shareholder, have equal ownership in the company if they hold the same number of shares. In case two or more people jointly hold a few shares, then they will be collectively counted as one shareholder. They will jointly have the rights of ownership as granted by their shares. This means that in a shareholder meeting, only one of them can vote and not both.

 

4. Transferability of Shares

Any shareholder can transfer his or her ownership by simply transferring the shares to another person. If the shareholder sells off his or her shares, then the buyer acquires the same rights of ownership as the original shareholder. This feature helps the company survive well beyond the lifetime of the shareholder.

A point to note here. The shares in an OPC are not freely transferable as the company can have only one shareholder. Any transfer of ownership means that the entire ownership is being transferred.

 

5. Perpetual Existence

A company continues to exist until the time it is wound up. Since shares are transferable, the shares pass on to the nominees or beneficiaries on the death of the shareholder. This means the company will exist well beyond the lifetime of its current shareholders. In case of an OPC, there is a clause for a nominee director to whom the share ownership will pass if the original shareholder passes on.

 

6. Growth Capabilities or Economies of Scale

The inherent structure of a company allows it to carry on business without any limitations. For example, in a sole proprietorship or a partnership, the growth depends on the personal capabilities of the proprietor or the partners. The loans they can take, the risks they can assume, etc. all depend on the owners of the business. However, a company being a legal entity of its own is not dependent on the capabilities of its shareholders. It can acquire assets, take on debt, and make growth plans and act on them as per its goals. The larger the business, the more efficient the corporate structure becomes vis-a-vis the proprietorship or partnership model.

 

Disadvantages of a Limited Company

 

7. Long Formation Procedure

Forming a company is a long job. There are quite a few steps involved including getting the Digital Signature Certificate (DSC), Director Identification Number (DIN), agreeing on and getting approval for the name, preparing the Memorandum and the Articles of Association, agreeing on the directors and getting their consent, etc.

 

Filling the forms can be a daunting task in itself, leave alone preparing the Memorandum and the Articles. It always helps to seek advice from experts who know how to get the work done without the promoters facing too much of a hassle.

You can also read: How to Check Company Registration Status on MCA?

8. Costly

 There are several costs involved with running a company. For instance, you will have to get the annual accounts audited every year, fill and file a number of forms, deduct income taxes on payments and submit them to the IT department, file the necessary GST returns and pay the taxes, hold board and shareholder meetings, etc. All this involves a cost. In addition to the fees for filings, you will also have to pay the auditors, the tax professionals, etc. You do not have to incur most of these costs in a proprietorship or even a partnership.

 

9. More than a Few Compliance Measures

There are a considerable number of compliance requirements for a company. From keeping certain books of account to maintaining records of meetings, their minutes and resolutions, a company has enough work. Not adhering to these compliance measures means hefty penalties and in some cases even imprisonment. That is why it is suggested that companies hire professionals to keep a track of these requirements and ensure that they are met.

These were, in brief, the main advantages and disadvantages of a limited liability company. Hope these points help you understand the concept better and further help you establish a business of your own.

 

 

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