Limited Liability Company and who runs it?

Introduction to Limited liability company

The Corporate Structure in India is flexible enough to allow multiple types of companies, for example, limited liability company etc. to be set up. The idea and objective of the company being set up define what kind of company it will be. Consequently, the Companies Act, 2013, deals with the various classification of companies. The classification can be done based on:

Liability;
Control;
Incorporation; and
transferability of shares of the company

The focus of the current study is a classification based on the liability of the company, i.e. the three types as mentioned in section 3(2) of the Companies Act, 2013- (a) Unlimited Companies (b) Companies limited by guarantee (c) Companies limited by shares.

Company and Its Characteristics

The most basic thing to do would be to discuss what exactly a company is. Section 2(20)[1] defines a company as an entity that gets incorporated under the Companies Act, 2013 or a previous company Act. It is registered coming together of certain persons to form a legal entity, with a perpetual succession carrying liabilities.

Features:

Legal Entity- Section 9 of the Indian Companies Act, 2013 has an effect of making the association a legal entity. It is a separate entity from its shareholders/members. The company makes a decision under its own name and seal. The assets of the company are held by the company and are separate from its member’s asset.
Artificial Person – Similar to what has been defined above, a company is an artificial person, it is its own person and does not depend on its member. The company enjoys all the legal rights of a natural person. But it is not a natural person and is still an artificial person and needs representation.
Perpetual Succession – A company being an artificial person is not dependent on its members to survive. This means that even if a member of the company faces insolvency, or there is a transfer of shares, or the member dies, the company would continue to exist. This again proves that a company behave like a legal entity having perpetual succession and that the death of a company is through legal means.
Common Seal –A company has its own identity as an artificial person;hence it has its own signature. Documents which have the seal of the company will be legally binding.
Limited Liability –A company cannot be held liable for more than what its limit is that is to say that a creditor cannot claim more than the liability of a company and its members. A member will only be liable for what they have subscribed for.
Transferability of Shares – Only with certain restrictions, a person/member/shareholder is entitled to transfer the securities held by them to another person.

Liability Classification

A company consists of members and share liability with the company. The extent of this liability differentiates companies from one another. It is believed that “limited liability is a privilege conferred by the state as a result of the act of incorporating or forming some other type of limited liability business”.[2] The three types of liability classification previously mentioned are primarily dependent on the investment into securities done by each member, and the liability they undertake while becoming a member.

Unlimited Companies

Under Section 2(92)[3] the definition given is “unlimited company means a company not having any limit on the liability of its members”. Section 3(2)[4] provides a choice to persons interested in forming a company with unlimited liability. The meaning is quite simple: a company which has no ‘limit’ on what the liability of a member during debt will be. If such companies have a share capital, then it will be a public company or in absence would be a private company, under section 65[5], May increase the share capital by increasing its total shares. This is only possible when such a capital share is only utilised when the company is to wound up.This means that a company has to provide for a reserve share capital when there is a conversion from an unlimited to a limited company. U/s 295(2)[6] In order to pay the debts, unlimited companies through setoff can pay the contributory the due amount, but as a member of the company, no amount is to be paid. A Company formed as an unlimited company is unpopular, and the reason is that members would be liable with no limit set and as much as partners. The plus point is that contributors, creditors cannot sue a member directly.

Companies Limited by Guarantee

According to Section 2(21)[7], a company limited by guarantee means a company in which the liability of each member would be limited to the shares of subscribed by them. Members of such a company undertake in the memorandum of a company to contribute only a specified amount of assets during the winding up of the company. ‘guarantee’ is the amount that a member undertakes in the memorandum. The liability of members is limited to the undertaking given by them in the memorandum. Such companies could also be a private or public company based on the existence of share capital. Since most of the companies that are formed as companies limited by guarantee are trust institutes or research institutes, they are dependent on the entry fee and the subscription by its members. This is because the amount paid by members goes to the reserve capital that is to be called upon the winding up of a company and not before.

Also Read Brown versus La Trinidad, (1887) 37 Ch. D. 1

Companies Limited by Share

According to Section 2(22)[8] a company limited by sharesmeans a company in which the members would be liable for the number of shares they have subscribed to in the memorandum. In such companies, the shares of the members reflect in a proportion of the liability that the members have with the company. The liability of the shareholder is not a fluctuating one but the one that is fixed as per their subscription. Any unpaid share can be gained any time during the lifetime of a company limited by share.[9] These are one of the most popular companies and generally have a share capital. Their share capital can further be divided by (a) equity share capital; (b) preference share capital[10] Moreover, in a company limited by shares, a member holding equity shares is given a right to vote on every resolution[11]Personal properties or assets of the members/shareholders will not be company property, or they won’t be forfeited when the company is winding up or is going through bankruptcy.

Registration of Companies

Before a company is registered, the number of persons involved decide the type of a company it will be, private, public or one person. Furthermore, section 3 states that “A company formed under sub-section (1) may be either—

(a) a company limited by shares; or

(b) a company limited by guarantee; or

(c) an unlimited company”.

The first step is to obtain the DSC, i.e. Digital Signature Certificate for the directors involved in the private limited company. The main purpose of the DSC is to sign theeforms.
Filing of the MOA and approval of AOA as per the guidelines in section 4 & 5 of the Indian Companies Act, 2013.
It shall be filed with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, documents and information for registration as per section 7 of the Act.
As per Section 9 of the Act, after a company is registered and incorporated, people can subscribe to the shares of the company and become its members. Furthermore, the section also grants the company ‘perpetual succession’; this gave the company a power to hold assets under its own name and to sue and be sued in its own name. The property in question could either be tangible or intangible.

Limited Liability Company

LLC is indeed a legal entity, but it is yet to be recognized by Indian Law. In foreign law, it is generally preferred by small businesses and corporations due to its tax benefits and the nature of its management. LLC offers a cross between traditional corporations and partnerships;[12] thus, LLC can have more than one owner, and these owners could be anyone from private individuals to foreign entities and even other LLC’s. These owners are more commonly referred to as members.[13] While LLCs might not be a thing in India, Public and Private companies form a major part of the Corporate structure in India. While it is suitable for small businesses to have a corporate structure of an LLP, bigger managements prefer a public limited company. While a public company does not offer the protection of an LLP, it can have its benefits.

Also Read Section 194: Prohibition on Forward Dealings in Securities of Company by Director or Key Managerial Personnel

These features make it remarkably similar to LLP. Afterall, LLP, and LLC both are pass-through Business type entities.[14] This means that partners/members of both the entities only have to pay income tax on their share of the business. These benefits are varied from state to state (in case of USA), and LLCs are governed by state statutes. LLC’s may be formed to get the tax benefits of a partnership while having the limited liability of a corporation.The LLC provides very few limitations on voting rights and distributions, permitting voting power to be based on completely different criteria than the criteria used to determine the distribution of profits.

LLC requires the owners to file a document known as Articles of the organization for the LLC to be a legal entity.[15] Articles of organization are the United States’ version of Article of Association. Owners are supposed to state the details of the incorporated entity to get it registered with the concerned officials. The next step for forming an LLC would be for it its members to come together to agree.[16] This agreement might not be required for some incorporations as LLC Acts differ from one state to another. In case it is not required; the members would be governed by default terms and conditions. This agreement may be written or oral. This agreement is required to address the following issues:

The manner of allocation of shares. This determines the division of profits and loss. Furthermore, tax division is also decided through this;
Voting power among its members will be divided through what means;
Which actions would require voting to be performed;
When will the LLC be Dissolved;
Rules regarding admissions and disqualification of membership; and
Duties and liabilities of the members.

The operating agreement in an LLC establishes the ownership rights among the members of the company. Furthermore, the rights, duties and obligations of the members also get specified in the agreement. The same goes for non-members who work for the LLC.In the absence of an operating agreement, state laws take priority in governing LLCs; and will impose default rules on many aspects of the LLC which could be avoided by drafting an agreement.The limited liability company is formed between two or more persons who undergo losses accordingly to their contributions. When the limited liability company contains one person, it was called “a one-person company”. The Partners of the LLC may be individuals or legal entities.

Conclusion

The conclusion that can be drawn is a company is a separate legal entity, but it consists ultimately of members, shareholders, the board of directors etc. A company is run and represented through the following personnel. With the various kinds of liability that may be established through a company, a company may be of different types depending upon its purpose and needs. One such model is LLC. LLCs are not formed in India owing to the existence of LLP. LLP functions in a similar fashion and consequently eradicates the needs for LLC. LLC is run like any traditional company, through its directors and shareholders.

References:

[1]Section 2(20), THE COMPANIES ACT, 2013.

[2] Solomon & Collins, Humanistic Economics: A New Model for the Corporate Social Responsibility Debate, 12J. CORP. L. 331, 338 (1987).

[3] Section 2(92),THE COMPANIES ACT, 2013.

[4]Section 3(2), THE COMPANIES ACT, 2013.

[5]Section 65, THE COMPANIES ACT, 2013.

[6]Section 295(2)(a), THE COMPANIES ACT, 2013.

[7]Section 2(21), THE COMPANIES ACT, 2013

[8]Section 2(22), THE COMPANIES ACT, 2013.

[9] S.S. Gulshan, “COMPANY LAW”, (2nd Edn,2009), Excel Books, New Delhi at p.34.

[10] Section 43, THE COMPANIES ACT, 2013.

[11] Section 47, THE COMPANIES ACT, 2013.

[12] Larson, Aaron (8 May 2018). “What is a Limited Liability Company (LLC)”. ExpertLaw. https://www.expertlaw.com/library/business/limited_liability_company.html

[13] Johnston, Kevin. “What Is the Difference Between a Shareholder vs an LLC Member?”.Hearst Newspapers, LLC. Houston Chronicle. http://smallbusiness.chron.com/difference-between-shareholder-vs-llc-member-61708.html

[14]Schwindt, Kari (1996). “Limited Liability Companies: Issues in Member Liability”. UCLA Law Review. 44: 1541. http://heinonline.org/HOL/LandingPage?handle=hein.journals/uclalr44&div=43

[15] C.T. Corporation, “The Limited Liability Company Handbook”, 2012,

https://foleypearson.com/global_pictures/CT_Corp_LLC_Handbook_2012.pdf

[16]Id