written by khatabook | December 2, 2022

What are the Essential Components of a Limited Liability Company?

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Table of Content


LLC or limited liability company is a business based on the characteristics of a partnership, a sole proprietorship, and a corporation. The limited liability feature of the company is akin to a corporation, while the flow-through taxation feature is characteristic of a partnership. Hence the onus of repayment of the company’s liabilities and debts does not rest on the owners. Any individual or entity but for banks and insurance companies can be a member of an LLC. 

Did you know? The profits on the taxes are not paid directly by the LLCs, and the profits and losses are passed on to the members and are filed on their tax returns.

What are LLCs?

According to the Indian Corporations Act, a company is defined as a legal entity. There are several types of companies. A limited liability corporation (LLC) is a type of business that has less formal legal requirements than a limited liability partnership and a sole proprietorship. Since its founding, it has been known by many as a Limited Liability Corporation. Like other types of corporations, limited liability firms are created in accordance with the Indian Companies Act of 1956. 

The most notable aspect of a limited company, as opposed to a private limited business, is the members' restricted liability. According to the company's laws and regulations, no partner is personally liable for the wrongdoing or responsibility of any other partner

To get a registration certificate from the Registrar of the Companies, a limited liability company must be registered in a private or public limited company. Due to its numerous advantages over other business structures, limited liability firms have been steadily expanding in India.

Type of Limited Liability Company

The types of LLCs are mentioned below:

 

Also Read: Online Business: Advantages and Disadvantages

Characteristics of a Limited Liability Company

The following are the characteristics of a limited liability company: 

  • Separate Legal Existence
  • Limited Liability
  • Flexibility in Taxation
  • Simplicity in Formation and Operation
  • Owners as Members

The terms mentioned above can be better understood in the following section-

  • Separate Legal Existence

An LLC can act as a separate legal entity as it has a distinct legal identity from its owners/ members. An LLC is capable of owning properties and filing lawsuits. 

  • Limited Liability

The LLC members enjoy limited liability protection as they are responsible only for their actions and cannot be held liable for the mistakes committed by other company members.

  • Flexibility in Taxation

The LLC also offers flexibility in taxation. 

  • Simplicity in Formation and Operation

Forming an LLC is a simple process and is registered under the Companies Act of the country. 

  • Owners as Members

The owners of an LLC are referred to as its members. They manage the company or appoint one of the members to manage the operations of the company. A professional manager can also be .

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Features of a Public Limited Liability Company

As per the Companies Act 2013, a public limited company enjoys limited liability and can offer shares to the general public. The company's stocks can be acquired by anyone through the stock market or IPO. 

The characteristics of a public limited company are mentioned below:

  • Directors

 A minimum of 3 directors are required to form a public limited company, and there is no restriction on the number of directors.

  • Limited liability

The liability of each shareholder is limited to the invested amount.

  • Paid-up Capital

A public limited company requires a minimum paid-up capital of ₹ 5,00,000 or more.

  • Prospectus

A public limited company must issue a prospectus.

  • Name

The company must add the word ‘limited’ at the end of its name.

Limited Liability Company Advantages and Disadvantages

The advantages and disadvantages of an LLC are discussed below:

Advantages of Limited Liability Company

The benefits of a limited liability company are mentioned below.

  • Liability

Since the company is a separate legal entity, the investors are protected against debts incurred by the company.

  • Ownership

There are no restrictions regarding ownership of the company.

  • Shareholding structure

The incorporation of the company requires only two shareholders.

  • Documents of the company

The company documents can be prepared in English. This is a significant advantage, as foreign companies can establish LLCs in the country.

  • Capital

To establish an LLC company, minimal capital is required compared to other businesses.

Disadvantages of Limited Liability Company 

The disadvantages of a limited liability company are mentioned below.

  • Limited liability companies are suitable for small businesses and could be better for significant businesses that need to grow and expand.
  • A limited company should be dissolved on the bankruptcy or death of a member, and it cannot continue operating like a corporation. If a member leaves the company, it requires winding up. If need be, the remaining members can form a new LLC.

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Private Limited Liability Company

A private limited company is a small business operated privately. The liability of members in such a company is limited to the shares they hold, and the shares of such a company cannot be publicly traded. 

Characteristics of a Private Limited Company

The characteristics of a private limited company are mentioned below:

  • Members 

As per the Companies Act, 2013 minimum of 2 members is required to form a private limited company, and the membership can be 200 members or less.

  • Limited liability 

The liability of each member is limited. So the individual assets of the shareholders are safe.

  • Perpetual succession

The company continues to exist despite its members' death, bankruptcy, or insolvency.

  • Index of members

Unlike public limited companies, a private limited company does not need to keep an index of its members.

  • Number of directors

A private limited company needs only two directors to function.

  • Paid up capital

A Private Limited company must have a paid-up capital of ₹1,00,000.

  • Prospectus

A private limited company does not require to issue a prospectus.

  • Minimum subscription

The minimum subscription should be 90% of the shares issued by a company.

  • Name

The name of a private limited company must mention Pvt limited at the end.

Also Read: What Is White Label and How Does It Work?

Requirements for Private Limited Company Registration

The requirements are discussed below.

  • A private limited company requires a minimum of two members to a maximum of 200.
  • A minimum of 2 directors are required to operate the company, of which one must be a resident of India.
  • The company name must include Pvt Limited at the end.
  • When registering the company. The owners must provide a temporary address until it is not registered. After registration, a permanent address must be provided.
  • The company should obtain a digital signature certificate which is used to verify the authenticity of the documents.
  • Professionals like chartered accountants, company secretaries, cost accountants, and others are required to provide certification at the time of incorporation of the company. 

The detailed requirements are mentioned below: 

  • Minimum 7 shareholders are required to form a private limited company
  • A minimum of 3 directors is required to register a private limited company
  • The Digital signature certificate (DSC) of any one of the directors is needed when submitting copies of identity and address proof.
  • An application should be made for choosing the company name
  • An application stating the main objective of the company must be submitted
  • The application must be submitted to the ROC along with the necessary documents
  • Payment of the prescribed registration fee should be made
  • After the approval from ROC, the company must apply for the certificate of business commencement

Conclusion

We hope this article has been of help in providing information about limited liability companies. A limited liability company is easily incorporated and must be registered under the Companies Act. 2013. It offers benefits in the form of limited liability and can be formed with minimal investment.

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FAQs

Q: What are the Disadvantages of a Limited Liability Company?

Ans:

The LLC has two primary disadvantages,which are as follows: 

  • Limited liability companies are suitable for small businesses, and they could be better for significant businesses that need to grow and expand.
  • A limited company should be dissolved on the bankruptcy or death of a member, and it cannot continue operating like a corporation. If a member leaves the company, it requires winding up. If need be, the remaining members can form a new LLC.

Q: What are the characteristics of a private limited liability company?

Ans:

 The characteristics of a private limited liability company are mentioned below:

  • According to the Companies Act, 2013 minimum of two members. The maximum number of members can go up to 200. 
  • The liability of each member is limited
  • The company continues to exist despite its members' death, bankruptcy, or insolvency, and it does not need to keep an index of its members.
  • A private limited company needs only two directors to function, and
  • The company must have a paid-up capital of ₹ 1,00,000.
  • It does not require issuing a prospectus.
  • The minimum subscription should be 90% of the shares issued by a company.
  • The name of a company must mention Pvt limited at the end.

Q: What are the advantages of a limited liability company?

Ans:

The advantages are given below:

  • Liability - Since the company is a separate legal entity, the investors are protected against debts incurred by the company.
  • Ownership - There are no restrictions regarding ownership of the company.
  • Shareholding structure - The incorporation of the company requires only two shareholders.
  • Documents of the company - The company documents can be prepared in English. This is a significant advantage, as foreign companies can establish LLCs in the country.
  • Capital - To establish an LLC company, minimal capital is required compared to other businesses.

Q: What are the characteristics of an LLC?

Ans:

The characteristics are:

  • Flexibility in Taxation
  • Limited Liability
  • Owners as Members
  • Separate Legal Existence
  • Simplicity in Formation and Operation

Q: What are the types of limited liability companies?

Ans:

The types of LLCs are mentioned below:

  • Private Limited Company
  • Limited Liability Partnership 
  • Public Limited Company

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.