Limited Liability Corporation and Partnership

Limited Liability Corporation and Partnership Student FIN/419 January 16, 2011

Limited Liability Corporation and Partnership

Limited Liability Corporation and Partnership Careful consideration is taken when opening a new business. A variety of pros and cons are evaluated before the business can open. Understanding the advantages and disadvantages of these will help entrepreneurs make the right decision. A common question is whether a company will be open as a limited liability corporation or as a partnership. The role of a limited liability partnership is the ability to open a business without all the risk of a general partnership or that of a corporation. The limited liability partnership became common during the early 1990s. At that time only two states had statutes based on LLPs. The Uniform Partnership Act added LLPs by 1996. Limited Liability Partnership A limited liability partnership can be created in any state. One stipulation exist which is that each state has its own way of governing the limited liability partnership. In this type of business all partners have limited liability. Each partner is liable for their own acts and mistakes; however, the partner is not responsible for other partners mistakes. The limited liability partnership is taxed as partnership. The most common form of an LLP is accounting and legal companies. An advantage of this business is the ability to switch from a general partnership to that of a limited liability partnership. No re-execution is needed of contracts and the deeds do not need to be renamed. Another advantage would be the profits not taxed twice. With a corporation the profits and the distributed profits are taxed.

Limited Liability Corporation and Partnership

A disadvantage would be that there are some restrictions and they vary by state. Another disadvantage is that if a partner makes a mistake, the other partners are liable for them. Financially, this can be risky. Limited Liability Corporation In the 1990s a new business entity emerged. This is known as a limited liability corporation. This is an infused version of a corporation with the added benefits of a general partnership. This form of business venture is the most popular form according to the IRS website. This business structure gives its members the advantages of a limited liability with-out the extra taxations. This form can be created in many states and the governing rules vary by state. This type of company can be compared to an S corporation in regards to having limited liability and being taxed as a partnership. The difference is that a limited liability corporation can own as much as 80% of another corporation. The people allowed ownership of a limited liability corporation can include non-U.S. residents. According to 4inc.com (2010), "The definition of a limited liability corporation is that it is really a limited liability company. Things to consider when creating a LLC is that instead of an article of incorporation, the form used is an article of organization. Instead of bylaws, which are needed by a corporation, the governing documents are known as an operating agreement. The forms of need and are similar to those of a corporation include the minutes of organization meeting. These should be conducted and recorded in case of lawsuits. One of the most common differences is the amount of paperwork required of an LLC. It is much less than that of a corporation. The LLC can have a pass-through

Limited Liability Corporation and Partnership

taxation; the LLC can also file an S corp. election. Incorporating a business will not allow you to do that. A disadvantage to an LLC would be the taxations. The members of an LLC will be required to be tax as self employees. If the company loses 35% to non-manager, the LLC may lose the use of cash method of accounting. Also if at least half of the profits are sold or exchange, the company can loose its federal status. Some states will tax an LLC and not a partnership. Conclusion When choosing a form of company to open, I would personally open a limited liability partnership. This form of business has everything I need. As the company changes so will the need of a limited partnership. In time the decision can change to form a limited liability corporation; however, at the moment a partnership will benefit me. Before opening up a business it is important that more research be conducted. Although there are many sources, not all are credible. Some credible sources would include the IRS website and the SBA.

References 4inc.com. (2010). Limited Liabilty Corproation. Retrieved from http://www.4inc.com/limited-liability-corporation.htm Gitman, L.J. (2009). Principles of Managerial Finance (12th edition). Boston, MA: Pearson-Prentice Hall.