Investors accept limited liability companies more than others when they want to establish small or medium projects or seek to support developing projects in a safe and reliable environment. How can a limited liability company be defined, established, and does it have certain characteristics that make it increasingly popular in this way? Our article reveals the answers to these questions. We also provide basic information about this type of company’s founding and differences from others. We also present to you the viewpoints of Qoyod accounting software experts in confronting some of the challenges that hinder limited liability companies.
What is a limited liability company?
The L.L.C. Limited Liability Company is a type of institution operating in the business sector that combines the characteristics of financial companies and individual companies, providing a tremendous deal of flexibility and protection to its partners. Its partners are financially responsible for its debts and limited to their capital shares. It is also established, starting with two or more partners, and it is allowed to increase the number of partners to 50 partners. If one of them dies, the company is not dissolved, but rather the deceased’s share is transferred to his heirs.
How to establish limited liability companies
Entrepreneurs often resort to establishing a limited liability company as a starting point for their projects and businesses. When entrepreneurs intend to establish a limited liability company, they follow these steps:
- Choosing and registering the company’s name and activity, and determining the location in which it will be headquartered.
- Writing the company contract, reviewing it with the relevant authorities, and amending any clause that requires amendments for the company to obtain legal acceptance.
- If there are any foreign partners, they must obtain security approval and verify all their identification documents before accepting and approving the form.
- Ensure that all official company documents are ready and submitted to the relevant authorities.
- Conduct a verification of the company’s trade name to ensure that it is not similar to any other company’s name, and then open a frozen account in a bank in the company’s name until the procedures for establishing it are completed.
- The partners obtain a deposit certificate upon opening the account, which verifies the company’s name, the partners’ shares in it, and the capital value. They then submit this certificate and other documents to the company’s commercial register.
- Pay the fees for issuing a commercial registration and obtaining a tax card.
- Thus, the partners obtain the establishment decision and begin the process of registering it with the relevant government agencies.
- Finally, the final licenses are obtained, and work begins.
Rights of partners in a limited liability company
Partners in this type of company enjoy rights that guarantee them effective participation in the management of the company, in addition to preserving their shares in profits. These rights include the following:
- Receiving their shares in profits in the same prescribed proportions that they contributed to the company’s capital.
- The effectiveness of their participation in making decisions affecting the company and the right to have their decisions and viewpoints taken into account.
- Participate in the company’s management and administrative tasks.
Duties of partners in a limited liability company
Just as partners have rights, they have duties towards the company they founded, and these duties are sufficient to help the company achieve its founding goals. Among these duties are the following:
- Complying with the laws stipulated in relation to their work.
- Providing the funds that were agreed to be contributed to the company’s capital.
- Cooperation between partners, team spirit, and unity prevail in achieving the goal.
- Honesty in company management.
- Carrying out any duty agreed upon in accordance with the company’s contracts and official papers.
Characteristics of limited liability companies
There are a number of features and characteristics that make limited liability companies more distinct from others, including the following:
- The company is a legal person and has legal compliance rights in its name.
- The company’s owner, known as a member, can have one or more owners and remains unaffected by the departure of one or more members.
- A member can manage it, or an appointed manager can take over.
- The company provides protection to its members through limited liability. The liability of company members remains limited, and they are not responsible for the consequences of other members’ actions and errors.
- Annual meetings collectively make decisions, which rely on putting them to a vote and needing a majority to pass.
- LLCs offer a wide range of tax treatments, allowing their members to customize their taxation to align with their business practices and goals.
- The procedures for establishing it are simple, as the law clearly defines the foundations upon which it is established.
- If a partner dies, his share passes to the heirs, and legal persons are allowed in this type of company partnership.
- If the number of partners exceeds the limit permitted by Saudi law, it becomes a public joint stock company.
Advantages of limited liability companies
From the above information, we can extract a number of advantages related to limited liability companies, which we can mention in general in the following lines:
- Financial security for partners, because the partner contributes to paying the company’s debts within the limits of his share only, which means that he will not go bankrupt if the company goes bankrupt.
- The company can be established to work on small or medium projects, thanks to its flexibility and limited liability, in addition to not requiring large capital.
- The LLC drives more business investments, which contributes to startups’ growth.
- The company is not subject to winding up due to the death of a partner, and because of this, it is safe and reliable from the investors’ point of view.
- Partners can trade their shares thanks to the rights granted to them by the company.
- The company can choose the tax system that suits its interests, and it is not required to pay certain types of taxes.
- The company can expand by adding up to 50 partners, thereby enhancing its growth potential.
Disadvantages of a Limited Liability Company
Despite all the advantages mentioned above, limited liability companies also have disadvantages, which include the following shortcomings and negatives:
- The company’s board of directors does not have a clear structure, and this may lead it to make confused decisions.
- Although the company is an independent legal entity with separate financial liabilities, it does not have the right to make savings deposits.
- The company cannot be merged, and it has a default lifespan that is specified in its contract and is renewed for only 12 months, then expires upon the expiration of the specified period.
- The company’s small capital may cause its commercial credit to be limited, and it is not possible to increase it over time.
- The company’s profits are subject to taxes.
- Limited liability companies harm creditors because their only security is their capital.
- It is not considered the best choice when it is intended to be offered in public trading.
The difference between a limited liability company and a one-person company
A one-person company is a type of new company established by one individual. It is not the same as limited liability companies, and there are several differences between them, which are as follows:
| Comparison | Limited Liability Company | One-person company |
| Number of partners | One person. | The number of partners can be up to 50. |
| Tax treatment | Money company. | Money company. |
| company management | Only owner with all powers. | It is managed by appointment or delegation with limited powers. |
| Conversion between the two types | Limited-liability companies can be converted into one-person companies. | A one-person company can be converted into a limited liability company. |
| Company monitoring | Carried out by the General Oversight Authority. | There is no monitoring. |
| Changing clauses in the company contract | It is possible on the condition that an extraordinary assembly is held and the change is discussed and voted on. | Possible by the administrative decision of the director. |
| Records | The class book is the highlight. | The daily journal and inventory book are the most important. |
Challenges faced by limited liability companies
The limited liability company provides complete protection for business owners and shareholders, but it nevertheless faces a number of challenges and risks that must be dealt with more wisdom. Below, we inform you of the most important of these challenges while proposing appropriate solutions to them from our point of view in the Qoyod accounting program as experts in the field.
| The challenge the company may face | Advice from Qoyod experts on dealing with it |
| There are many factors that may cause the company to fail, such as: · Intense competition. · Lack of funding. · Inability to properly satisfy market needs. |
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| Money problems in the company, such as: · Default in paying dues. · Business disruption. · No increase in funding. | · Develop plans to ensure obtaining the necessary funds. · Careful management of company funds. · Reducing unnecessary expenses while referring debt management to competent people. |
| Legal obstacles are: · Change legal regulations. · Inability to comply with legal and legislative matters. | · Employing a legal advisor who follows up on legal changes and helps the company comply with any change. · Working to update the company’s legislative policies as they go. |
| Expansion problems: · The need for more powerful and experienced management. · Lack of adequate infrastructure for the new size of the company. · Lack of competencies among the company’s employees to maintain the expansion path. | · The solution is to define an appropriate strategy for growth and expansion, keeping all growth requirements in mind and providing them according to time plans. · Recruiting new competencies among employees. · Providing training and courses for employees to improve their performance and make them qualified for expansion. |
Conclusion
We have provided you with everything you need to know about limited liability companies and how to establish them, knowing that they are among the most flexible companies in the business sector and capable of growth, expansion, and transformation into larger companies. This is one of its many advantages, and confronting the challenges that hinder its success is easy with the proper planning and practical strategies that the Qoyod accounting program advises you on. You should now take advantage of the free 14-day plan on the Qoyod accounting system, through which you will enjoy services and courses that help you manage your company, create its accounts, and organize its financial and tax transactions safely and reliably. So register now for the program and start putting your company on the right path to success and brilliance.
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