Kejian 168
Business & Management Resources
Archive for April, 2009
The limited liability company (LLC) is the new kid
on the block of business organizations. It has become
popular with many small business owners, in
part because it was custom-designed by state legislatures
to overcome particular limitations of each of
the other business forms, including, in some contexts,
the corporation. Essentially, the LLC is a business
ownership structure that allows owners to pay
business taxes on their individual income tax returns
like partners (or, for a one-person LLC, like a
sole proprietorship), but that also gives the owners
the legal protection of personal limited liability for
business debts and judgments as if they had formed
a corporation. Or, put another way, with an LLC
you simultaneously achieve the twin goals of passthrough
taxation of business profits and limited personal
liability for business debts.
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The vital role of credit card as the important liquidity source for individuals and small businesses purposes is becoming ultimate necessity, since almost 80 percent of the U.S. households owning at least one credit card (some people own as much as 10 credit cards at once).
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Most smaller partnerships are general partnerships,
meaning that all owners agree to manage the partnership
together, and each partner is personally liable
for debts of the partnership. However, there are
two other fairly common types of partnerships: limited
partnerships and registered limited liability partnerships
(RLLPs). Each of these is quite different from
a general partnership.
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The limited partnership. Owners use the limited
partnership structure when one or more of the partners
are passive investors (the “limited partners”) and
another partner runs the partnership (the “general
partner”). You must file a Certificate of Limited Partnership
with the Secretary of State (or a similar state
filing office) to form a limited partnership, and pay a
filing fee. The advantage of a limited partnership is
that, unlike a general partnership, where all partners
are personally liable for business debts and liabilities,
a limited partner is allowed to invest in a partnership
without the risk of incurring personal liability.
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If the business fails, all that the limited partner
can lose is a capital investment—that is, the amount
of money or the property that partner paid for an interest
in the business. However, in exchange for this
big advantage, the limited partner normally is not
allowed to participate in the management or control
of the partnership. If the partner does, the partner
can lose limited liability status and can be held personally
liable for partnership debts, claims, and other
obligations. This disadvantage has caused many
business owners who might form a limited partnership
to turn to the limited liability company (LLC).
LLCs offer pass-through tax status, limited liability
protection, and the ability to participate fully in the
management of the business.
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Typically, a limited partnership has a number of
limited partner investors and at least one general partner
who is responsible for partnership management
and is personally liable for its debts and other liabilities.
The registered limited liability partnership. The
registered limited liability partnership (RLLP) is a
special legal structure allowed in most states that is
designed specifically for professionals (attorneys,
accountants, architects, engineers, and other specially
licensed businesspeople). An RLLP is formed
by filing a Registration of Limited Liability Partnership
form with the Secretary of State (or other state
agency that handles business filings). The point of an
RLLP is to relieve professional partners from personal
liability for claims against another partner for professional
malpractice. However, professionals in an
RLLP remain personally liable for their own professional
malpractice.
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Example: Martha and Veronica operate a twoperson
accounting partnership, registered as an
RLLP. Each has her own clients. If Martha loses a
malpractice lawsuit, and Veronica did not participate
in providing services to the client who won the
suit, Veronica should not be held personally liable
for the judgment. If partnership insurance and assets
are not sufficient to pay the judgment, Martha’s personal
assets, but not Veronica’s, are subject to seizure
to pay the money due. In a general partnership
practice not registered as an RLLP, both Martha and
Veronica could be held personally liable for either
CPA’s individual malpractice.
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Although it’s possible to start a partnership with a
verbal agreement—or even with no stated agreement
at all—there are drawbacks to taking this casual approach.
The most obvious problem is that a verbal
agreement may be remembered and interpreted differently
by different partners. (And of course, having
no stated agreement at all almost always means
trouble.) Also, if you don’t write out how you want
to operate your partnership, you lose a great deal of
flexibility. Instead of being able to make your own
rules in a number of key areas—for example, how
partnership profits and losses are divided among the
partners—the lack of a written agreement means
that, by default, state partnership law will come into
play. These state-based rules may not be to your liking—
for example, state law generally calls for an
equal division of profits and losses, regardless of
partners’ capital contributions.
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