Why Form an LLC?
In the world of business, there are several different structures for doing business, mainly, sole proprietorships, partnerships (general or limited), corporations (s-corporations or c-corporations), and limited liable companies (LLCs). But let’s focus on the two types of partnerships and LLCs, and many businesses in the United States fits in one of those categories.
In a general partnership, all partners own the business, manage the business, and share the business’s gains and losses. A general partnership is advantageous because it is easier to form than a sole proprietorship via access to a wider pool of funds, capital, knowledge, skills, and contacts and has the opportunity for better management. In addition, each partner includes the business’s gains and losses in his or her individual tax returns; the partnership itself is not taxed. Nevertheless, all partners are liable for complying with contracts, lawsuits, court orders, and other actions taken by or upon the business. For example, if one partner is sued, the other is also subject to the suit. Similarly, if the business is failing financially and does not have enough money to pay debts, creditors can seize the partners’ personal assets. A general partnership is also disadvantageous because of its easy instability, i.e. the partnership could dissolve if a partner dies or leaves the company. Moreover, interest in the company cannot be transferred unless all partners agree.
Conversely, in a limited partnership, the general partner manages the business and the limited partner or partners only bring capital and assets to the business. The limited partner has limited liability regarding money and possible lawsuits and is only liable for the contributions he or she gives to the business; creditors cannot seize his or her personal capital. A limited partnership is advantageous because investors find it more attractive than a general partnership. Furthermore, all partners include the business’s gains and losses in their individual tax returns, and limited partners share both the business’s gains and losses but do not have to partake in the partnership itself. Nevertheless, if a limited partner assumes an active role in the company, he or she gains the same liability as the general partner who is personally liable for the company’s debts and other management responsibilities. In addition, the company cannot exist or start before the partnership or incorporation certificate is filed.
A Limited Liability Company (LLC) possesses some properties of a partnership and a corporation; LLCs contain a partnership’s tax benefits and a corporation’s liability. In an LLC, the company owners include the company’s profits in their individual tax returns and are only liable for their contributions in the company. There is no limit on how many owners there are in an LLC. Even a corporation or another LLC can be an owner, and there can be only one owner. An LLC is also advantageous because it is very flexible, and the operating agreement, established by the owners, determines how the company is governed. Nevertheless, how an LLC is formed is more complex than other types of businesses, and an LLC can receive a sole-proprietorship, partnership, or corporation tax classification.
Ultimately, an LLC seems the better and more profitable type of business than either a general partnership or a limited partnership. But all types of businesses need help. If you have a business and you need legal assistance, talk to a lawyer. For more information, contact Nashville Attorney Perry A. Craft.
Perry A. Craft has dedicated his life to helping people in need. He has tried, settled, or resolved numerous civil and criminal cases in State and Federal courts, and has represented teachers and administrators before school boards, administrative judges, and the state Board of Education. Learn more about Attorney Craft.