Analyze the Characteristics of a Limited Liability Partnership and Evaluate its benefits (if any) compared with other Business organizations
There are many business organizations mainly a sole trader, partnership and company these can further be broken down into a general partnership, Limited Liability Partnership (LLP), public company and private company. In this assignment we are going to analyze the characteristics of a limited liability partnership and evaluate its benefits (if any) compared with other business organizations.
Firstly a limited liability partnership is defined by Cook .C (2004) as a “body corporate, that is, they have a continuing legal existence independent of its members” this in simple English means the partnership will be considered as its own legal entity different from its members therefore its members are not held liable for any debts and obligations made by the partnership. It’s favored by many because of its characteristics. Mainly that the members have limited liability this is when the members are not held liable for any debts incurred by the partnership. Limited liability Partnership’s documents do not have to be published to the public, an LLP continues running even after one partner as died or even when a partner wants to move on. They can draw up a constitution though this is not compulsory it is advised so they set up an agreement on how the partnership is run and sharing of profits. On taxation issues, an LLP is taxed as personal income and does not have to pay corporate tax. It also has the ability
On the other hand we have a General Partnership this can be defined by Section1 of the Partnership Act (1980) as “a relation which subsists between persons carrying on a business in common with a view to profit”. A partnership has a minimum of 2 members and an unlimited maximum. Partnerships are mainly favored by doctors, dentist and accountants. Its main advantages are firstly the sharing of responsibility i.e. specialization. Specialization is when people work in their areas of specialty e.g. people who have studied finance go to the financial department. Another advantage is there is more capital input by the different members, partners can be added and lastly there are The Deeds of Partnership which can be used to counter harsh rules of the Partnership act (1980). Its disadvantages however are as follows the Partnership Acts (1980) which states that profit should be divided equally amongst each member of the partnership. Also in a General Partnership members have unlimited liability meaning that if the company was to file for bankruptcy creditors can acquire the person assets of the members. Members of a General partnership have joint liability this is defined as “when two or more persons are both responsible for a debt, claim or judgment. It can be important to the person making the claim, as well as to a person who is sued, who can demand that anyone with joint liability for the alleged debt or claim for damages be joined in (brought into) the lawsuit with them” (legal dictionary.2011)
A Registered Company is defined as “A legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights which are usually only reserved for individuals, such as to sue and be sued, own property, hire employees or loan and borrow money” (Davies, 1997). There are two types, a Public limited Company and a Private limited Company. In a Public Limited Company shares can freely be transferred to the public, there is usually the letters Plc at the end e.g. Zesa PLC and must have a starting capital of 50000(pounds) whilst a Private limited Company will have letters LTD at the end e.g. Zesa ltd. The can restrict the members. Its advantages has stated by Kelly. D, Holmes. A and Hayward.R(2000.p317) are that it has limited liability meaning the members of the company are not liable for debts or anything incurred by the company, Perpetual succession meaning the company still exist even if members of the company change also they have freedom to transfer their shares without restrictions, property is owned by the company and not its members e.g. Case of Macaura v Northern Assurance (1925) Lastly the company is protected by what is known as the veil of incorporation .This states that the company is separate from its members therefore the they are not liable for debts incurred by the company e.g. Case of Saloman v Saloman&Co. Its disadvantages is it’s harder to set up and requires a lot of money and it is a complicated structure
Lastly we have a Sole Trader this defined by (BBC, 2010) “business that is owned and controlled by only one person, although they may have employed workers, e.g. a newsagent’s shop” Its main advantages are that it’s easy to set up, only a small amount of capital is required and it’s easier to keep control of because they have a hand on approach to the business, but its disadvantages are as follows it has unlimited liability meaning the owner is the same as the business if business is in debt the owner is liable. Also it has long working hours and not that much capital to expand the business.
With this information we can now evaluate and compare the benefits of a Limited liability Partnership with the other forms of businesses. A limited Liability Partnership compared to Company you can tell that they are both similar in setting up as well as benefits. Both are made by filing articles of organisation, they both offer the same legal protection “veil of incorporation” which separates the members and partners from the company or partnership. They also both continue in existence until business completely closes down and they are likened to an investment machine because more and more people can join increasing the capital for expansion but the main difference between these two is the issue of taxation. As stated by (Nelson, 2009) “In general, both LLCs and LLPs don’t require the business to pay income taxes on its profits, but a corporation often has to pay income taxes on its business earnings and if those earnings are later distributed to an owner, the owner has to pay tax again” This is referred to as “double tax” meaning its better to be an Limited Liability Partnership than a Limited Liability Company. Also in a Limited liability Company when shares are being transferred from different individuals they also have to pay tax for that unlike limited Liability partnership whereby they aren’t taxed and they are free to distribute their shares. Another huge difference is the that Limited liability Company has to make its own constitution whereas even though its advised to do so a Limited Liability Partnership is not forced to create one. When it comes private documents LLP documents are kept private and not released to public scrutiny but the biggest difference is when it comes to the “object clause” defined as the objective of the company in the memorandum of association by(proeconomics.2010).A Limited Liability partnership is allowed to venture in other forms of business and not constrained to an object clause whereas a LLC Is limited and cannot venture into any other forms of business which aren’t mentioned in the memorandum under object clause but a Limited Liability cannot register as a charity organization whilst a Private Limited Company can.
Compared to a Sole trader it depends what exactly you want. A Sole Trader is much easier to set up than a limited liability Partnership. A sole trader does not need any documentation whilst the Limited Liability Partnership need to and he acquires all profits and has all decision making power whilst in a Limited Liability Partnership profit is shared between all the members (shareholders) and decision making is more complex because board meeting have to be held resulting in slower response to problems than a Sole Trader. Otherwise a Limited Liability Partnership is better in the sense that you firstly they have more capital to expand business because they can sell shares. There is less workload and specialization takes place than a sole trader who acts as the accountant, marketer and all positions in the company. Most importantly in a limited liability partnership there is limited liability meaning the members are separate from the company therefore their personal assets are protected by the veil of incorporation whilst a sole trader as unlimited liability hence if the business was to go bankrupt the owners personal assets can be seized by any creditor. Other difference is that a Sole Trader is taxed differently they have a fixed tax therefore it’s a disadvantage because Limited Liability Partnerships have control of being able to chose the proportions of salary and dividends taken from them.(DIYaccounting,2009)
Lastly a Limited Liability Partnership compared to an ordinary General Partnership they are very similar in the sense that they both have a minimum of two partners and a maximum of unlimited partners, therefore they can both generate more capital. They can both also add more partners and in turn brings in more resources to expand the business. In a Limited Liability Partnership and in a General Partnership there are more people than when trading solo therefore they both have less workload and can both specialize in their departments. They are both affected by fiduciary duty which is defined by AbdulJaami (2007)as the “duty to act in the best interest of the partnership” meaning they have to reveal any issues concerning the company that benefits them e.g. dealing with another company that one of the partners owns ,that partner has to let other partners know. A General partnership however has unlimited liability meaning the personal assets of the partners can be seized by creditors whilst a Limited Liability Partnership has limited liability and the partners are not held liable for any legal action which is taken against the company. A general Partnership is however easier to set up but another disadvantage it has against the LLP is the “joint liability”. Joint liability is when all of the partners have joint liability so all legal action taken against the partnership is therefore taken jointly against all partners and not only one of them meaning if one of the partners doesn’t have any money and legal action was taken the partner with the money must ay for all of it. Therefore an LLP is better than a general partnership.
This has shown us the benefits and disadvantages of a Limited Liability Partnership, a Limited Liability Company, a Sole Trader and lastly a General Partnership. With all the information gathered we analyzed the benefits of a Limited Liability Partnership and have seen that it has more advantages compared to its disadvantages with other business organization. Therefore a Limited Liability is the best option for a business organizations, it offers security as well as other financial benefits like tax.
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