Over the years, several intending or prospective entrepreneurs always have this question in view, with regards to which form of a business venture to start up and why. Most times, they are unable to recognize the clear differences between these two business entities and which to register: Business Name (enterprise) and Limited Liability Company.
It may help to first get a clear understanding of what these two major business entities are before we seek to highlight some of their basic differences.
Limited Liability Company (LLC)
A Limited Liability Company also known as LLC is a legally separate Business entity. Generally referred to as a legal entity, where the directors and the shareholders have limited liability in the business. By law, a company is seen as a distinct person, separate from the persons who formed it. This makes it a separate legal entity. The owners of a company are referred to as the Directors (Members)or Shareholders by reason of shareholding. Consequence of its legal status, a company is binding, protected and possesses the same rights as a normal individual which means that a company can incur debt, sue and be sued.
A Business Name (BN) generally referred to as a sole proprietorship is a business entity that is registered, owned and headed and operated by a single individual only. The person and his business are “one-and-the-same” in legal terms. This individual is legally accountable for every single loss and profit in the business. In the case that the business incurs debt or defaults in anyway, the sole proprietor is held responsible personally, because he and the business are one and the same. On the bright side, he has complete control over his business and does not have to share his profits with anybody.
Key Differences Between A Limited Company and A Business Name.
Business Name Registration
- The Proprietor / s are personally responsible for all the affairs pertaining to the business.
- The law does not make any distinction between the owner and his business. In the eyes of the law, both the owner and his business are the same.
- Since the law does not distinguish between the owner and his business, the liability of the business is unlimited. For instance, If the business runs into dept or becomes bankrupt, the owner becomes liable, and will have to raise money from personal assets or personal savings to pay off the creditors and lenders.
- The sole trader is also liable to pay for any legal compensation that might arise in the course of running the business. He will not be able to defend himself by saying that the act was committed by his business and not by him.
- A sole trader remains the final and total authority with regards to decision-making. He is under no obligation to take advisement from anyone and has the right to take decisions he deems to be fitting.
- He retains the rights and ownership of all profit made by the business. Likewise, he also has to bear all the burden of loss.
- A business name as a legal entity may come to an end if the owner becomes bankrupt or has an untimely demise, if he had not appointed a successor to look after the business.
Limited Liability Company (LLC)
- A limited liability company is a separate entity and is a separate person in the eyes of the law. Since a limited company is a separate person, it can employ the services of relevant personnel to make up the workforce of the business. These personnel which can be responsible for the basic and major operations of the company, may include a board of directors of the company, the company secretary as well as other staff.
- An LLC can consist of a minimum of two shareholders and the limit of their liability is by the value of shares they own.
- The capital for starting an LLC is generated by issuing shares. The group of persons who the shares are issued to are termed shareholders. The shares can be issued to the general public only if it is a public limited liability company.
- The liability of the shareholders is limited to the amount paid by them during the purchase of the shares. For e.g. If the company goes into debts, they are not liable to pay to the lenders and creditors from their own personal finance.
- The company is generally held separately for any misconduct, the case will be filed against the company and not the directors.
- Decisions on the mode of operation of the company are made in deliberations by the board and bound by its resolutions.
- The profits made by the company can be distributed among the shareholders as dividend. Alternatively, it can also be used for the expansion of the company.
- A company has a continuing existence, which is not altered by the death of any of its shareholders or directors.