What is a Limited Liability Company (LLC)? Origin, meaning, and international use
The term “Limited Liability Company” (LLC) is one of the most widely used concepts in the business and legal world, but at the same time it is also one of the most diversely interpreted notions.
Under this general definition many corporate structures worldwide, such as the Société à Responsabilité Limitée (SARL) and the Société anonyme (SA) in France and Luxembourg, the German GmbH, or the Spanish Sociedad Limitada (SL), meet the criteria for “limited liability.” According to this, in theory, all of them could be classified as “limited liability companies.” However, in legal and business practice, the term LLC has a more specific and technical meaning that varies depending on the jurisdiction:
- United States: in this country, the LLC is a type of company created in the 1970s to combine the limited liability of corporations with the operational simplicity and tax flexibility of partnerships and sole proprietorships. It does not allow listing on the stock exchange, and the management rules are relatively informal and flexible. This type of company is mainly used for small and medium-sized businesses, joint ventures, and family holding companies.
- United Kingdom: although the language is the same as in the United States, the legislation is different, and there is no type of company with the designation LLC. However, two types of limited liability companies can be distinguished: Private Limited Companies (Ltd) and Public Limited Companies (PLC). Although both offer limited liability, only PLCs can be listed on the stock exchange, and the term “limited company” usually refers to Ltd (private company) as the entity most similar to the US LLC.
- Continental Europe: in countries such as Luxembourg, France, Germany, Spain, and Italy, the functional equivalents of the LLC are entities such as the SARL (Luxembourg/France), GmbH (Germany), or SRL (Italy). These structures are designed for private companies and have less strict rules than public corporations, although they all comply with the premise of limiting the liability of their partners.
As a result, although there are a large number of corporate structures that offer limited liability, the term LLC in the modern international context is more commonly used to refer to private, flexible commercial companies geared toward small and medium-sized entrepreneurs and generally subject to restrictions on raising public capital and listing on the stock exchange.
Although it might seem correct to use LLC as a synonym for any limited liability company, it is advisable to reserve it for those companies that, in addition to protecting the assets of their partners, are designed to operate flexibly and privately.
The equivalent of the LLC in Luxembourg: the SARL
In Luxembourg the Société à Responsabilité Limitée (SARL) is the legal structure that most closely resembles the US LLC or the British Private Limited Company (Ltd).
Its structure is flexible and offers a lower administrative burden compared to Sociétés Anonymes (SA), making it very popular among entrepreneurs. It is so popular that it is the most common type of company in the Grand Duchy, with around two-thirds of the country's companies operating under this model.
The main characteristics of this type of company are presented below, without going into greater detail. Those interested in a more comprehensive review of this type of company may find our complementary article on how to establish an SARL in Luxembourg very helpful.
- Limited liability: The first feature is obviously the ability of these types of companies to offer partners liability that is limited to the capital contributed. This allows partners to protect their personal assets from the company's debts.
- Number of partners: It can be formed with a single partner (single-member SARL) and allows up to a maximum of 100 partners. Partners can be individuals or legal entities.
- Share capital: the minimum capital required is 12,000 euros and must be fully subscribed and paid up at the time of incorporation. There is also a simplified version (“SARL-S”) that allows for reduced share capital starting at €1, aimed at micro-enterprises.
- Administrative bodies: this type of company is managed by one or more managers who may or may not be partners; a board of directors is not required, as is the case with other structures. These managers are responsible for the day-to-day administration of the company.
- Transfer of shares: shares cannot be offered publicly, and their transfer to persons who are not already partners requires the approval of at least 75% of the share capital, although this percentage may be reduced to 50% in the articles of association.
- Incorporation: to set up an SARL, the articles of association must be drawn up and signed before a notary. However, in the case of the simplified version (SARL-S), the articles of association can be signed privately, which speeds up and reduces the cost of the incorporation process.
Main differences between US LLCs and SARLs
When referring to LLCs, it is because one has in mind either the jurisdiction of the United States or the legal language of that country. When looking for an equivalent in Luxembourg, the Société à Responsabilité Limitée (SARL) has been found to be the legal structure that most closely resembles it, and its main characteristics have been reviewed. However, there are some differences with US LLCs that are worth noting for those who are familiar with this type of structure.
- Legal framework: US LLCs are regulated by state laws and since each state can establish different rules there is a wide variety of particularities among LLCs depending on the state. Luxembourg SARLs on the other hand are governed by the country's Companies Code, which makes regulations uniform throughout Luxembourg.
- Management and governance: an LLC can be managed directly by its members (“member-managed”) or through appointed external managers (“manager-managed”) as agreed in the operating agreement. SARLs also differ in this respect, as they are managed by one or more managers and offer fewer possibilities for customization in their governance structure.
- Capital requirements: there is no minimum amount required to set up an LLC, while to set up an SARL at least 12,000 euros is required (or just 1 euro for an SARL-S) and the capital must be fully subscribed and paid up when the company is formed.
- Number of partners: in an LLC there is no maximum number of members, while in an SARL there is a maximum of 100 partners and exceeding this number entails the transformation of the company into another type of company.
- Transfer of shares: in an LLC shares can be transferred in accordance with the terms of the operating agreement, while in an SARL, the transfer of shares is restricted and requires the approval of the majority of the share capital.
- Taxation: this point marks an important difference as LLCs have a default “passthrough” tax regime in which profits are taxed directly on the partners, while Luxembourg SARLs are taxed directly as separate legal entities.
- Incorporation: an LLC can be incorporated easily and without a notary, but an SARL cannot; the latter requires a notarial deed, except in the simplified SARL-S version.
- Reporting obligations: LLCs have fewer transparency and financial reporting requirements than SARLs, which must comply with accounting and public reporting obligations.
When talking about LLC companies, it is essential to understand the scope of the term. Although in a broad sense there are many types of limited liability companies, the practical use of the term LLC is usually reserved for flexible, private entities designed for small and medium-sized businesses, such as the SARL in Luxembourg. This article has outlined the main characteristics of this type of company and its main differences from US LLCs, as although both legal structures have similarities, they also have their differences.
Now, if what brought you here is the idea of forming a company of this type in Luxembourg and you find yourself with lots of questions, remember that EasyBiz can help you. Don't hesitate to contact us. We can make everything easier for you.
