When a Limited Liability is a Smart Move

Last Updated: Mar 16, 2021
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Limited liability company formations are ideal in many situations. Dividing up financial and legal responsibility is one of the major benefits of limited liability setups. Protections are different in each situation, as are taxation practices. Limited liability setups are not for every situation and should only be created when it makes sense for the business type and partners/owners involved. A lot of the determination of when you can file your company as a limited liability entity depends on the regulations set forth by each locality respectively.

Limited Liability Company

In a limited liability company (LLC), each partner or owner files taxes on his or her share of the company’s overall profits, including those working for the company but living abroad. The individual is taxed at a personal income level, rather than at a corporate level. If the company suffered a loss, the loss can be calculated to offset some of the income that must be reported.

Setting up an LLC is tedious due to the mountains of paperwork that must be filed. An attorney should be hired to help you through the documents to ensure that each party involved understands the terminology and their responsibility in the company. An LLC must also adhere to the set taxation guidelines in reference to LLC operating agreements. This step ensures that the company is not registered as a corporation.

Limited Liability Partnership

In a limited liability partnership, one or more partners is typically only an investor. Their status is made simply for the capital (money) provided to operate the business. In this situation, one to two partners are typically assigned as the points of contact, decision makers and liable parties. Liability for specific sectors of the business can also be assigned in this situation.

This is ideal for businesses with multiple functions. Partners can protect each other from total company liability, allowing only the partner at-fault to face consequences for either poor business practices or legal difficulties associated with the business. In cases where partners are not being open and honest, those that were unaware of a situation are kept safe.

Company Limited by Guarantee

A company that requires a legal personality but plans to work in the non-profit sector, is a company limited by guarantee. In nearly any case, the word “limited” must be present in a company’s name. There are a few instances, not included by law where the use of the suffix “limited”, in abbreviated form as well, is not required.
Share capital is not permitted in companies limited by guarantee. If specific provisions in the articles of company formation are written correctly, a company of this type may distribute profits to members (dividends). Those limited by guarantee without sharing of profits with members, or one not categorized as a Community Interest Company (CIC), may be listed as a charitable organization.


Limiting liability for companies and partnerships has several advantages. Corporate taxation rates are avoided and only the responsible parties suffer consequences during legal proceedings. This allows a business to maintain operations without restriction during times of turmoil. Perhaps the biggest advantage is only filing taxes on your share of the profits.

Financial responsibilities are able to be divided in limited liability partnership situations so that those only wanting to put forth funding can do so without being involved in the business’ dealings directly. Investors typically are not held responsible should legal proceedings take place.


The process of forming a limited liability is lengthy and requires more paperwork for approval. It takes more time for the proper departments to review each set of paperwork to ensure that it is in proper compliance and that your business is setup in the proper manner. It can also be difficult to register a company name where limited liability is in effect.

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Closing Thoughts

When considering the formation of a limited liability partnership or company, it is important to read the regulations regarding limited liability in your local city. Regulations vary by specific location, rather than nationally. Limited liability partnerships are ideal for small, single-location businesses as they are easier to manage financially and helps the business restructure easily, as needed. Discuss the business types available for your business with all of those that are listed as owners to ensure that all of the owners agree on all business-related decisions.

Article by

John Carter

John Carter is a leading expert in the company formations industry. He has assisted countless business owners incorporate companies and is a font of knowledge when it comes to starting a company! If you found this blog interesting, please do share the love!

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