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Published: Fri, 02 Feb 2018
Limited Liability and Other Forms of Business Organisations
A Limited liability partnership (also known as a limited liability corporation) is a form of business ownership that composes of the characteristics prevalent in both structures of a partnership and a corporation. As such, unlike partnerships or corporations, the owners of a Limited liability corporation (LLC or LLP) known as members are not limited in number and may be composed of corporations, other LLCs or natural persons. The creation of an LLC requires the minimum of a general partner and a limited partner. The duties, rights and obligations of these members is similar in status to those of the partners in a general partnership. Because of the limited amount of contribution exposed to the risks of investment, the limited partners are considered mores as investors than partners; in addition to the fact that they are not required to manage the business (Hillman, 1997).
In the United States, the increase in limited partnerships in associated with the unique tax advantages available for the partners. Profits and losses can be directly passed with certain limitations) to the partners because the limited partnership is not taxed as a separate legal entity. This form of business organisation has been highly favored because the limited partners are exempt from personal liability towards the business obligations and debts. Incorporations in the real estate, rental and leasing businesses are the major beneficiaries of the LLCs. Against other forms of business organisations like the limited partnerships LLCs pose greater competition by offering partnership taxation treatment and limited liability for owners.
according to Arthur and Sheffrin (2003, p. 183), the LLC or LLP is made of distinct partners due to the statutory rights and responsibilities accorded to both limited and general partners. However, the difference between the rights and responsibilities of general partners in a limited partnership against those of a general partnership should be stipulated in the statute and the partnership agreement. Because of the ‘limited’ nature of limited partners, general partners become personally responsible for the obligations and debts of the company (Moszoro, & Gasiorowski, 2008).
The limited partners of a LLC are entitled to specific rights and responsibilities. Considered a ‘limited’ party, the limited partner enjoys fewer rights and hence has fewer responsibilities than other partners. Their limited liability means that their risk is limited to the investment amount in the LLC. Unlike other partners, the interest of a limited partner is perceived as personal property. For instance if the partnership owns land, the limited partner will have an interest in the limited partnership and not the title to the assets.
According to Emerson (2009) partners in a general partnership are allowed to participate in the management of the company; while limited partners attempting to participate in the control of the partnership will be faced with the risk of losing his/her limited liability status. According to the Revised Uniform Limited Partnership Act (RULPA) 2001, specific responsibilities and powers are outlined through which a limited partner will lose their limited liability. Some of which include attending partners’ meetings; proposing or pursuing a derivative action in place of the company; acting as surety or representing a guarantee for the company; approving, voting or disapproving dissolution, sale or transaction in place of the business; or winding up of the company. Similarly, the RULPA states that exercise of powers not stipulated under the Uniform Limited Partnership Act 2001 do not imply the interference of a limited partner in the partnership business. With reference to the likely loss of limited liability status by a limited partner guilty of participating in the partnership business, the newer Uniform Limited Partnership Act 2001 opines that the guilty party is not personally liable. Instead, the statute grants certain rights to the limited partners, in addition to the right to information about the operation of the partnership. Furthermore, they are allowed to inspect the records of the business; voting rights on matters affecting the partnership (Browning et al., 1976).
Advantages and disadvantages of LLCs
A Limited Liability Corporation structurally composed of corporation and partnership features provides limited liability to its owners, transferability of partnership interest, and flexibility of profit distribution. On the contrary, LLCs are faced with a number of disadvantages; limited life, shares floatation, and added complexity.
First, in comparison to a corporation, the limited liability for partners relieves the partners of any personal liability for the obligations and debts of the company, but the general partners do not enjoy the limited liability status. As a result, it is a requirement for every limited partnership to have one general partner tasked with the personal liability of the limited partnership’s obligations and debts. Secondly, a limited partnership enjoys income tax benefits. Because income is distributed or ‘flows through’ to the partners, the entity is not subject to federal income taxation. In some states however, the limited partnerships are not exempt from State Income Taxation. Thirdly, limited partners compared to general partners enjoy transferability of partnership interest. This benefit guarantees more freedom for limited partners within the limited partnership, not available for general partners. It is unfortunate though for limited partners concerning the control of business which is prohibited. This disadvantage for limited partners was previously punishable by likely loss of the liability status for a partner, but is now generally prohibited on various circumstances (Sandrock, 1984).
Fourthly, limited partnerships unlike sole proprietorships or general partnerships lack business continuity. The limited partnership ceases to exist in the event that a partner leaves or dies. The limited liability companies have to comply with the state’s formalities and regulatory requirements necessary for a proper and legal incorporation. Furthermore, limited partnerships unlike general partnerships and sole proprietorships may be subject to various reporting requirements. Lastly, limited partnerships unlike general partners and sole proprietorships can attract passive investors that will exempt of the obligations and debts but be vital in contributing the finances for the limited partnership. In the formation and maintaining of the limited liability partnership, certain legal and organization expenses are inevitable. These costs are usually greater compared to the setting up costs of either a general partnership or a sole proprietorship (Schneeman, 2009).
Other forms of business organisations
A sole proprietorship is owned and operated by a single individual, hence it is easy to set up; easy decision-making process because the owner is completely in control; taxation on the business is done once as income to the owner. On the other hand a partnership which is owned and run by more than one person allows limited liability for the owners on the firm’s debts; increased access to finance through stocks and bonds; professional management can be hired; and the business has going concern, irrespective of loss of owners. Similarly, a corporation which is owned by shareholders provides limited liability to the value of the shares held. The shareholders enjoy limited liability for the firm’s obligations; access to financial assistance through stocks and bonds; hiring of professional management; and eternity in its life.
On the contrary, the sole proprietorship has certain disadvantages. Being the sole owner of the firm, the proprietor has unlimited liability to the firm’s obligations; and faces the challenge of singly contributing the capital for the firm. Unlike the sole proprietorship, the partnership is easily set up as the partners contribute the capital for the set up. However, the partnership is faced with difficult decision-making disagreements may exist between partners; partners have unlimited liability to the firm’s obligations; and numerous legal complications arise whenever a partner leaves or dies. The corporation is also faced with disagreements between owners and management due to conflicting goals; management overlooking the decisions made by the owners; income being taxed twice, as corporation profits and as income to owners. Additionally, the establishment and running of a corporation is complicated and complex due to the legal obligations involved (Arthur, & Sheffrin, 2003, p. 190).
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