Roles of Limited Corporations and Partnerships
In today’s society people are establishing new businesses with different business structures - Roles of Limited Corporations and Partnerships introduction. The individuals need to check with the state they reside to see if the particular entity is acceptable. The paragraphs below will explain the roles of limited liability corporations and partnerships. The paper will also explain the business structure that will be more appropriate to use when opening a small business. Limited partnerships (LPs) According Gitman (2009), to Limited partnerships is a partnership in which one or more partners have limited liability as long as at least one partner ( the general partner) has unlimited liability.
In limited partnerships at least one of the owners is considered a general partner who makes business choices and is personally responsible for any debts the company might incur. Limited liabilities also have at least one limited partner who invests funds in the business but has a minimum control over day-to-day operations and decisions. Limited partners give financially to a company, for example; a LP might contribute $50,000 into a real estate partnership but cannot contribute as much too any activities in the business.
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Since LPs have no management control they have protection against personal liability. This basically means that a LP cannot be forced to use personal assets to pay off any company debts but a LP can lose the money invested in the business. LPs individual partners have to report and pay their share of revenue each year for tax purposes. Because LPs are not active in a company they do not have to pay self-employment taxes. In any case if evidence proves a LP has been active in a business, the individual will be held responsible for any general partnership claims.
Another type of partnership is Limited liability partnership. Limited liability partnership (LLP) According to Gitman (2009), LLP is a partnership that is liable for their own acts of malpractice, but not for those of other partners. LLPs must have two or more owners. Death of a partner does not end a LLP, it continues and another partner can join with agreement with the other existing partner. The partners of an LLP can participate in the daily activities of the company like management decisions and operations.
Limited liability partnerships do not have to pay income tax but are responsible to pay some type of annual tax fee. Another entity structure that appears to be popular in most states is the Limited liability corporation. Limited liability Corporation (LLC) In Limited liability corporations the owners are not personally liable for any company liabilities or debts; therefore creditors cannot make the owners in the LLP to use personal assets like cars, houses, or stock to pay off a company debt.
For example, if a law-suit is filed against ABC Company only the company’s assets will be at risk. The only way a member’s personal assets can be at risk if a member is required to sign a contract through the company like a loan contract. Individuals in a LLC are called members and LLCs has no limitation to how many members it has, it can be other LLCs and corporations. In LLCs taxes are paid individually and not with the business so members do not have to worry about paying double taxation. A downside to LLCs when a member passes away or goes through bankruptcy then the LLC breaks up.
For example, if a member or members form a LLC to develop a product and later decides to sell the copyright of that product then the LLC can be closed and the profits split up between members. Choosing the right entity for a company is very important. An individual should check with the local laws and regulations of the state before opening up a business. If I was to open up a small clothing boutique I would choose LLC because I can be a single member (only business owner) whereas a LLP requires two or more partners.
If a customer decides to sue the company then he or she can only get the assets of that company and not my personal assets like my house and personal stock. I will be able to contribute to the decisions in the management’s duties and responsibilities. The preceding paragraphs explained the roles of LLCs, LPs, and LLPs. LLPs and LLCs are governed by different regulations, rules, and laws so business owners need to make sure how each entity will affect his or her business activities and which entity is acceptable in a particular state.