Introduction
Business ownership varies by jurisdiction, and several business units exist. The four common forms of business include sole proprietorship, partnerships limited liability companies, and cooperatives. These four forms of business have characteristics that make them suitable for different investors. Limited liability companies are very common in most countries around the world. This is because of their nature which makes them appropriate in the contemporary corporate world. In the United States of America, there exist laws that define the nature of limited liability companies (Reuting, 2011).
This law dictates their formation, operations, and their dissolution. In the Kingdom of Saudi Arabia, the government spells out what is expected of a limited liability company. The two countries have defined limited liability Companies based on their national laws and the laws guiding international commerce. This means that although there are several features that the two types of companies share, there is also a marked difference due to differences in the national laws of the two countries (Volhard & Stengel, 1997). This research is based on analyzing limited liability Companies in the two countries, noting similarities and differences.
Formation of a Limited Liability Company
One of the factors that make limited liability companies popular is the simplicity of their formation. For the formation of a limited liability company in the United States, the law states that there should be an article of association and memorandum association. The name o the company should be spelled, and in the name, the words ‘limited liability Company’ should appear. This is to ensure that anybody or any entity that gets into any binding relationship with it should be aware that the owners of the firm are limited in liability.
In the article of association, the physical address of the firm should be clearly stated, the purpose of the firm, the name of all the members who are forming the firm, and the location of its office. These requirements are in line with the requirements put in place by the ministry of commerce before a firm can be registered as a limited liability company (Volhard & Stengel, 1997). Upon depositing all the necessary documents with the right office, the relevant department will approve them, upon which a firm can officially start operation while waiting for the official certificate.
The law in both countries upholds this. The only difference in the process of registration of a company is that in the Kingdom of Saudi Arabia, it takes a longer period to receive the certificate. It is also important to note that when forming a limited liability company, it would take shorter steps (reduced bureaucracy) to accomplish the process in the United States than in the Kingdom of Saudi Arabia (Spadaccini & Spadaccini, 2011). The Kingdom of Saudi Arabia has eliminated all trade barriers, and just like the United States, the nationality of the investors may not be a barrier to the registration of a company as long as the individuals are confirmed to be of integrity.
Operations of a Limited Liability Company
The operation of a firm will always depend on the law of the host country. Different countries have different laws that govern how a firm should operate. When defining the operational activities of a firm, the most crucial factor that will be determined is how the firm relates to other entities, individuals, and the government. In both countries, the law states that firms shall operate as separate entities from their owners.
This means that such a firm shall have the freedom to enter into a legally binding agreement with another firm, sue, and be sued over its activities within the country. As Sitarz (2007) observes, a limited liability company has all the rights to operate within a country as an entity that can engage in all the activities specified when registering it through its agents. The limited liability company will be responsible for all the actions of its agents as long as they were working in their capacity as agents of the firm.
Share Capital
One of the main factors that define a limited liability company is a capital it uses to operate. In both countries, limited liability companies can be categorized into two. The first is the private limited liability company. The second type is a public limited liability company. In both countries, the minimum number of shareholders in the company for limited liability companies is two while the maximum is fifty.
The Saudi company laws state that when this number exceeds fifty, then the firm will cease being a private limited company (Martin, 2011). On the other hand, for a public limited company, there must be a minimum of five registered whose liabilities will fully be limited to the shares they have in the firm. The law does not specify the maximum number of shareholders within this form of Limited Liability Company. One striking difference between the two types of companies is the way the two can source their capital.
A private limited is not allowed to outsource its capital from the public in the United States. On the other hand, a public limited company can source capital from the public by selling shares to them. The shares sold to them will give them percentage ownership of the firm. This is not possible with a private limited liability company. The same principles apply to the laws that govern companies in Saudi Arabia. There is a difference in the minimum amount of capital that a public limited liability company should have to be considered appropriate to go public. In the Kingdom of Saudi Arabia, this minimal capital should be about 2.7 million US dollars.
Management
The management of limited liability companies makes it unique from other forms of businesses that exist. In a sole proprietorship, the owner is always the manager, and he or she would hire individuals to help in the daily running of the firm. In partnerships, the partners are the managers of the firm. In cooperatives, the members are the managers. In limited liability companies, on the other hand, management of the firm are individuals employed by the firm for this purpose (Shenkman, 2003). Within a limited liability company, there is a clear structure that shows how management is structured.
At the helm are the shareholders of the firm which meets annually to discuss the progress of the firm. In the annual general meeting, the shareholders are always informed of the progress of the firm over the last trading period.
They may also be called upon to make an important decision on the approaches the company should take in the market. In both the United States and Saudi Arabia, the law states that the number of shares one has in the company would determine the strength of the vote (Mandido, 2011). This means that one share will be equal to one vote. During the annual general meeting, shareholders will elect a board of directors who will be in charge of directing important issues of the firm on behalf of the shareholders who do not get involved with the daily activities of the firm. The board of directors will be headed by a chairperson who will chair all the meetings of the directors. In most cases, the shareholder with the highest shares in the firm would always be the chair.
The board of directors will appoint the chief executive officer of the firm. It is the chief executive officer who will be responsible for the daily running of the firm’s activities. The chief executive will offer guidance in hiring, deploying, transferring, and firing employees within the firm.
All other employees will be answerable to the chief executive who will work hand in hand with other senior employees within the firm to ensure that the vision of the firm is achieved. The chief executive will be answerable to the board of directors chaired by the chairperson. The board of directors will then report to the shareholders during the annual general meeting of the firm. The vision of the firm is always guided by the employees of the firm headed by the chief executive officer. During the annual general meetings and the meetings of the board of directors, the chief executive officer is always the secretary (Mancapa, 2012).
This is important because he will be responsible for taking the minutes of the meetings. With the minutes, the chief executive will have all the details of the discussions, and how they should be implemented in the firm. Being the senior-most officers responsible for running the activities of the firm, it would be easy to implement the principles because he or she was part of the body that formulated it. This regulation is shared between the United States of America and Saudi Arabia.
Liability of Partners
One of the factors that make limited liability companies attractive to investors is the clause that states that the liability of shareholders is limited to their shares within the firm. In its normal operations, a firm will always be considered as an entity (person) who has the right to make its own decision and will be responsible for them. A limited liability company will operate independently from its owners. The actions taken by the firm will not bind the private life of the shareholder beyond the shares owned by the individual within the firm. As Humphreys (1998) observes, in the normal operations of a firm, cases can arise where a firm may be indebted to the level beyond its capital base.
In the Kingdom of Saudi Arabia, the law states that in cases where the debt of a company goes beyond 75 percent of its capital and the firm cannot pay promptly using its assets, then members would be called upon to help in clearing this debt. When this does not happen, then the firm will be subject to closure. This percentage has since been reduced to 50 percent. In the United States, however, no law dictates the percentage of debt beyond which a firm will be subject to closure. Instead, there is an Act that states that when a limited liability company is unable to pay its debts, then it would be subject to being placed under receivership. The creditor who has the highest value of credit with the firm may be allowed to manage the firm for a period within which the firm shall complete the debt.
In both cases, no law would force shareholders to pay for the debts of the firm using their private assets. The law which was enacted in Saudi Arabia on the need for the members to offer their help when a company is indebted to a given level is always meant to help avoid cases where a firm would be dissolved for the failure of paying its debts (Spadaccini, 2011). However, this law does not carry any consequence to these shareholders to the extent of their private property when they decide not to settle the debts of the company using their private assets. This is because this is the principal nature of a limited liability company. In such cases, the assets of the firm would be put on sale, and the debts would be cleared based on the percentage a debtor is owed by the firm.
Dissolution
The dissolution of a firm is a fact that cannot be avoided when a company is faced with serious economic challenges. The law in the United States of America clearly states the circumstances under which a limited liability company can be dissolved. In the Kingdom of Saudi Arabia, the law is also clear on the circumstances under which a limited liability company can be dissolved (Spadaccini, 2007).
According to the United States laws that govern the business operation, a limited liability company can be dissolved following a resolution of the shareholders, when the shareholders are cannot clear debts of the company hence it is declared bankrupt when the firm engages in activities contrary to those specified in the memorandum of association or when the government is convinced that the firm is engaged in illegal activities. In Saudi Arabia, the law specifies conditions under which, a limited liability company can be dissolved, and this does not vary much with that in the United States.
The main cause of the dissolution of companies is always bankruptcy. When a firm is declared bankrupt and the shareholders of the firm are not willing to give out their personal properties beyond the shares they have in the firm, then the firm would have to file for Chapter 11 bankruptcy protection according to the US regulations (Mancuso, 2011). The most memorable bankruptcy filing in the 21st century was that filed by Lehman Brothers on 15 September 2008. A company believed to be too big to fall Lehman Brothers was forced out of the market because of its inability to pay its debts and therefore was closed down. The Saudi government specifies activities it considers illegal. When a firm engages in such activities categorized as illegal, the government has express authority to recall its trading license (Cunningham & Proctor, 2012). That would force the firm to dissolve.
Advantages of a Limited Liability Company
Limited Liability Company has some characteristics that make it more attractive than other forms of business units. The following are some of the advantages of a limited liability company based on its legal characteristics.
- The formation of a limited liability company is simple. Once registered, a limited liability company can start official operations while waiting to be issued with a registration certificate.
- The operational activities of the firm do not require the physical presence of the shareholders. This is because the management unit is always appointed by the board of directors to take care of the daily running of the firm.
- The liability of the shareholders is limited to the number of shares they own within the firm. This means that in case the operations of the company lead to its bankruptcy, then the private properties of the shareholders will not be used to settle the debts.
- Given the fact that limited liability companies operate as legal entities, the consequences of the actions taken by agents of the firm may not have a direct and legal impact on the shareholders beyond the shares they hold within the firm.
- The law allows members to come in with personal property to help advance such a company whenever there is a need for that and all the shareholders are in mutual agreement of this.
Disadvantages of a Limited Liability Company
Limited liability companies have several disadvantages despite the advantages stated above. The following are some of the disadvantages of a limited liability company.
- For a firm operating as a private limited liability company, it may be challenging to source external capital that may be needed for business expansion.
- Some states in the United States such as New York, Texas, and Alabama among others levies franchise tax on limited liability companies. This would result in a scenario where a shareholder is double-taxed.
- Some of the shareholders may not be comfortable with the idea that someone else will always be in charge of their investments instead of themselves. This may make them invest with reservation.
- Professional limited liability companies such as those for lawyers, accountants, doctors, and engineers may not be recognized in some states.
- The protection of the property of the shareholders through the limited liability clause may breed a sense of irresponsible approach given by the shareholders. This is because they are assured that their private property will not be under threat.
Conclusion
Limited liability companies are one of the most popular forms of business in the current society. This may be attributed to the fact that their formation is relatively easy and it requires a range of the manageable population. A limited liability company operates as a legal entity. This means that it can sue and be sued, it can enter into a binding transaction with anybody and any other entity. A limited liability company comes with several advantages and disadvantages. The United States of America and the Kingdom of Saudi Arabia both have several limited liability companies. In both countries, limited liability companies share several characteristics that define their existence. However, due to differences in socioeconomic conditions, these two countries have laws that create some elements of differences between the two firms.
References
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