MGMT 312 Ch 38

Comparison of LLCs and LLPs for Business Formation

• LLCs (limited liability companies) are hybrid business structures that offer limited liability of corporations and tax advantages of partnerships.

• LLCs have become the preferred structure of many small businesses, but they are governed by state statute, and the laws differ from state to state.

• LLCs share many characteristics with corporations and must be formed and operated in compliance with state law.

• The formation of an LLC requires filing articles of organization with a central state agency, which contains basic information about the business.

• LLCs are separate legal entities and can sue or be sued, enter into contracts, and hold title to property.

• The key advantage of LLCs is the limited liability of its members, who usually are not personally liable for any loss or injury caused by the wrongful acts or omissions of the LLC.

• Another advantage of LLCs is their flexibility in regard to taxation, as they can choose to be taxed as either a partnership or a corporation.

• The main disadvantage of LLCs is that state LLC statutes are not uniform, and businesses that operate in more than one state may not receive consistent treatment.

• LLC members have considerable flexibility in managing and operating the business, and they can choose either a "manager-managed" or a "member-managed" LLC.

• LLC members can decide how to operate the various aspects of the business by forming an operating agreement.

• LLPs (limited liability partnerships) also offer legal protection for business owners, but their regulations and definitions vary by state.

• In most states, LLPs provide the same liability protection as LLCs, but in some states, protection is more limited.

• Some states require LLPs to designate a general partner who is fully liable, while other partners have limited liability.Overview of Different Business Forms

• LLCs can structure management and decision-making flexibly as either member-managed or manager-managed.

• LLPs must be managed by a partner and can only be taxed as a partnership.

• Other forms of business organization include joint ventures, syndicates, joint stock companies, and cooperatives.

• Joint ventures involve combining resources for a single transaction or project, such as contractors building and selling houses in a development.

• Reasons for forming joint ventures include leveraging resources, cost savings, and entering foreign markets.

• When forming a joint venture, the parties may set up a new entity, and the business form determines how taxes are paid.

• Syndicates are temporary alliances of businesses that pool resources and share risks to manage large transactions.

• Joint stock companies combine characteristics of corporations and partnerships and are often regarded as a partnership for tax purposes.

• Cooperatives are associations organized to provide economic services to members by pooling resources to gain advantages in the marketplace.