A Limited Liability Company (LLC) is a business structure that provides its owners with limited liability protection while offering flexibility in management and operations. It is a popular choice for entrepreneurs due to its balance of legal protection and organizational freedom.
What is a limited liability company?
Limited liability company (LLC) is not specifically defined under corporate law. A limited liability company is a legal entity that includes 2 types of businesses:
- Single-member limited liability companies;
- Limited liability companies with 2 or more members.
A limited liability company with two or more members is a business with 2 to 50 members, who can be organizations or individuals.
Members are responsible for the company’s debts and other financial obligations only to the extent of their contributed capital, except in the cases specified in Clause 4, Article 47 of the 2020 Enterprise Law. The transfer of a member’s capital contribution is governed by the provisions of Articles 51, 52, and 53 of the 2020 Enterprise Law.
A single-member limited liability company is a business owned by a single organization or individual (referred to as the company’s owner).
The owner of the company is responsible for the company’s debts and other financial obligations within the scope of the company’s charter capital.
(Clause 7, Article 2, Clause 1, Article 46, Clause 1, Article 74 of the 2020 Enterprise Law)
A limited liability company has legal person status from the time it is granted a business registration certificate. The liability of members is limited to the nominal value of the shares they hold, or the amount they guarantee to contribute to the company’s liability on liquidation.
Outstanding characteristics
Regarding legal person status
The LLC has legal person status since it is granted the Business Registration Certificate. Therefore, the enterprise has independent assets, its own seal and headquarters. It also independently participates in legal relations on its own behalf without being dependent on the status of the owner.
The company has its own charter that distinguishes other companies of the same or different types and is organized into a system according to the regulations of the Enterprise Law.
Regarding organizational structure
For limited liability companies with 2 or more members
- Board of members;
- Chairman of the Board of Members;
- Director or General Director.
The company must have at least one at-law representative who holds one of the following positions: Chairman of the Board of Members or Director or General Director.
For single-member limited liability company
If owned by an individual, the operating model can be organized including:
- Company owner;
- The company president is appointed by the owner (can concurrently hold the position of Director);
- Director (can be hired or held concurrently by the company’s President).
Owned by an organization, the operating model is allowed to include:
- Company President, Director or General Director;
- Board of members, Director or General Director.
Regarding capital mobilization
The LLC mobilizes capital through loan and credit activities from individuals and organizations. LLCs also have the right to issue bonds. Besides, the company can also mobilize capital in the form of increasing capital from owners and members of the company. LLCs with 2 or more members can accept additional members to contribute capital to increase charter capital.
Both single-member LLCs and LLCs with two or more members are not allowed to issue shares. Accordingly, limited liability companies are not allowed to issue many types of securities in the form of certificates, book entries or electronic data issued like joint stock companies.
In conclusion, an LLC offers a unique combination of liability protection, flexible management, and ease of capital mobilization, making it an ideal choice for many business owners looking to safeguard personal assets while growing their ventures.
Compare a single-member and a multi-member limited liability company.
Choosing between a single-member and multi-member LLC depends on factors like ownership, management, and tax structure. While both offer limited liability protection, they differ in key aspects that affect how the business operates and is taxed.
Similarities between the two types of limited liability companies
According to the provisions of the Enterprise Law 2020, a one-member limited liability company and a two-member limited liability company have the following basic characteristics:
– Have the legal person status from the date it is granted an enterprise registration certificate.;
– Members only have limited liability within the scope of their contributions.
– Conditions for increasing or decreasing capital can be adjusted;
– Control installation is not required;
– Business establishment registration procedures, dealing with similar products;
– Cannot issue shares, except in the case of a limited liability company converting into a joint stock company.
Differences between a single-member LLC and a multi-member limited liability company
1. Ownership of the LLC
- Single-member LLC Ownership – A single-member LLC has one owner (member) who has full control over the company. The LLC is its own legal entity, independent of its owner.
- Multi-member LLC Ownership – A Multi-member LLC has two or more owners (members) that share control of the company. The LLC is its own legal entity, separate from its owners. There may be an unlimited number of members in a multi-member LLC (unless it elects for S Corporation tax treatment, which allows for only 100 or fewer). The LLC may decide on how (what percentage of) profits and losses will be distributed among its members.
The ideal choice between single-member and multi-member LLCs depends on the specific situation, as each option has its own advantages and disadvantages. The number of owners alone doesn’t necessarily determine the best structure. In some cases, a single owner may benefit from converting to a multi-member LLC by adding a spouse or relative as a member. Conversely, multiple owners may find it more advantageous to create individual single-member LLCs.
2. Management of the LLC
A single-member LLC has one owner, who also serves as the manager. In contrast, owners of a multi-member LLC must decide whether they want the business to be member-managed or manager-managed.
The two management options are:
- Member-managed LLC: All members are actively involved in the business’s operations, and major decisions, such as contracts and loans, require the approval of a majority of the members. Unless specified otherwise in the formation documents, states typically consider LLCs to be member-managed.
- Manager-managed LLC: Members designate a manager—either one or more of the LLC members or a third party—to handle the daily operations and decisions. Non-manager members usually focus on high-level strategic decisions or serve as passive investors.
Regardless of the LLC’s structure, having an operating agreement is crucial. Though not always required by state law, this agreement clarifies each owner’s role, responsibilities, and decision-making authority. It also outlines what happens if a member leaves or dies, if the company dissolves, or in case of disagreements.
3. Capital Transfer
- Single-member LLCs: The company owner has the full right to transfer and dispose of all or part of the company’s charter capital.
- Multi-member LLCs: A member of the company who wants to transfer his or her capital contribution to another person must offer to sell that capital to the remaining members. The remaining members have the priority right to buy within 30 days from the date of offering and then if the remaining members do not buy, that member has the right to transfer to a third party with the same terms and conditions. offered to the remaining members.
Single-member LLC owners have the complete authority to transfer or dispose of their company shares freely. In contrast, multi-member LLC owners must follow a structured process, offering their stake to the remaining members first before they can transfer ownership to an external party. These distinct ownership rules ensure different levels of control and decision-making within each type of LLC.
4. Procedure to increase or decrease the the company’s charter capital
- Single-member LLCs: LLC increases its charter capital through the company owner contributing additional capital or mobilizing additional capital contributed by others. The company owner decides the form of increase and the rate of increase of charter capital. In case of increasing charter capital by mobilizing additional capital contributed by others, the company must transform into a multiple-member LLC or a joint stock company.
- Multi-member LLCs: The company may increase its charter capital in the following cases:
- Increase the member’s contributed capital;
- Receive additional the contributed capital from new members.
5. Taxation
For federal income tax purposes, a single-member LLC is generally treated as a sole proprietorship, while a multi-member LLC is treated as a partnership by default. In both cases, the LLC’s profits and losses pass through to the owners.
In a single-member LLC, the owner reports the business’s profits and losses, and the LLC itself does not file or pay taxes separately. The owner is also responsible for paying self-employment taxes (Social Security and Medicare) on all taxable income from the business. Income taxes are typically paid through quarterly estimated payments, along with any additional fees, such as franchise fees, that the LLC may owe.
In summary, single-member LLCs offer simplicity and flexibility, while multi-member LLCs provide shared decision-making and resources but require more complex management. The right choice depends on the business’s needs and the owners’ preferences.
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