Limited Liability Corporations and Limited Liability Partnerships Essay

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Limited Liability Corporation and Limited Liability Partnership Onorio Dimas
University of Phoenix
FIN/419
James Hagist
04/01/2013

Abstract

America has been known for many years as the land of opportunity both for Americans as well as foreigners in regards to starting a business. But, as easy as it has become to start a business, it is also important to understand the different options there is when structuring the business. This paper will concentrate on two important structures that can be used when starting a business and those are a limited liability corporation (LLC), and a limited liability partnership (LLP). This report will identify two advantages and two disadvantages when using an LLC and LLP. It will also give the authors description of a personal business idea, along with the writers choice of corporate governance, and what the advantages will be of choosing either and LLC or LLP.

Limited Liability Corporation

A Limited Liability Company (LLC) is a business structure allowed by state statute, owners of an LLC are called members, most states do not restrict ownership, and so members may include individuals, corporations, other LLC’s and foreign entities (IRS, 2012). It is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities (Investopedia, 2013). For tax purposes it is important to remember that in order to be classified as an LLC two or more members need to be a part of the corporation. An LLC has many advantages, one of the most appealing advantages for members of a LLC are the taxation rules because owners avoid double taxation. Another advantage of an LLC is that in most states an LLC is very easy to form, and having limited liability attracts many business owners to form an LLC. One more advantage of an LLC is the flexibility to form management as desired and not having to follow a strict corporation structure.

Disadvantages of LLC

Just like many business endeavors have many advantages it is important to understand that there many disadvantages as well. An LLC has a number of disadvantages that can make it unappealing to many people trying to start a business. Although the tax brakes where an advantage listed above, it can also be a disadvantage. The main reason for this is that if it’s chosen to not tax as an LLC then each individual member will be taxed individually and could result in a high amount. Another disadvantage is the fact there is no strict managerial role and it can lead to bad decisions being made that may have negative affects on a company. If a member of an LLC dies or goes bankrupt the LLC has to brake up and the company would have to dismantle.

Limited Liability Partnership

A limited liability partnership (LLP) is a partnership permitted in many states; governing statutes vary by state (Gitman, 2009). All LLP partners have limited liability. They are liable for their own acts of malpractice, but not for those of other partners (Gitman, 2009). With that being the biggest and most famous advantage of an LLP is the limited liability for the actions of other members of the LLP. If one member decides to do something illegal that would normally have affects on the entire company, in an LLP that member would be held liable for his own
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