Under the concept of limited liability, the owners have no personal liability over the debts and obligations of a limited liability company. As such, shareholders are only liable up to the extent of their shares’ face value and any unpaid amount or guarantee with respect to those stocks.
With regard to business decisions, a limited liability company has more flexibility when it comes to taxation because they can choose to be taxed as a corporation, proprietorship, or partnership and avoid double taxation as the case for corporations.
They also involve less recordkeeping than corporations since a limited liability company does not necessarily have to elect its board of directors or officers. However, raising capital for a limited liability company would be more difficult since potential creditors would be discouraged to extend credit with no guarantee or a limited liability. Also, the management structure might be complicated in cases where positions are not completely filled and have overlapping responsibilities and the limited liability company can be suddenly dissolved in case of owner’s death.
There is an ethical challenge involving the issuance of stocks for a consideration other than cash. In this case, companies might be predisposed to overstating the assets involved in the transaction to reflect a better image in their financial statements. Although noncash issuance of stocks are recorded at fair market value of the assets received, the perception regarding that market value can be different from one individual to another. As such, the fair market value of the assets should be determined by independent appraisers.
References:
- Cassidy, J. (2006). Concise Corporations Law. Retrieved from [http://books.google.com.ph/books?id=nx1IUDLtzmAC]
- Harrison, W., & Horngren, C. (2006). Financial Accounting. Retrieved from [http://books.google.com.ph/books?id=uKcYlYrzNJ4C]
- Kimmel, P., Weygandt, J., & Kieso, D. (2010). Financial Accounting: Tools for Business Decision Making. Retrieved from [http://books.google.com.ph/books?id=GIkfP1JxcHkC]
