Types of Partnership Business Organizations; Limited Liability Partnerships, LLCs & More

Partnerships are organized through agreements and are designed to advance the partner’s mutual interests. Partnerships can form between two natural persons, or joint ventures with two or more business entities. These partnerships allow the companies to take on projects that have a high startup or operational cost or that have an elevated risk factor. These usually are a general partnership involving unincorporated companies and persons. They are created by a written agreement, or formed by two or more persons and like a sole proprietorship, all members are liable for any legal actions or debts the company may incur. Partnerships are formed by film production companies, usually as limited partnerships discussed in the next installment, limited term projects and real estate investment projects. These are generally relatively short-term projects that have a determinate life span. Private equity companies are organized at general or limited partnerships.

Limited Partnership Pros & Cons

Limited Partnerships are formed under common law statutes like all partnerships and must consist of at least two people and at least one limited partner. The general partners have managerial rights, share property assigned to the partnership, and share profits in predefined proportions, but they also have “joint and several liability” for debts and legal actions against the partnership. Limited partners have no managerial rights and are not liable for debts or legal judgments. Limited partners enjoy the legal piercing theories as a corporate shareholder. And so long as funds are not co-mingled it is even more difficult. Limited partners are required declare their ‘limited’ status when dealing with third parties.

Limited Liability Partnership Definition

Limited Liability Partnerships remove the general partners of their individual responsibility for debts and legal process and granted limited liability to the general partners, in those states that adopted the Uniform Partnership Act and amendments.

Limited Liability Company Advantages & Disadvantages

Limited Liability Company or LLC: An LLC offers operational flexibility and management, passes tax liabilities through to the members, not incurring a liability at the LLC level (you only pay taxes once) and provides limited liability protection for the owner-members. This means that the members have a limited liability for debts and obligations of the company, similar to shareholders in a corporation. Profits and losses are passed through to owners, like a partnership. LLC’s are relatively new to the US business and legal fraternity. The first was created in 1977, so the body of law affecting the LLCs is still evolving, but it is very popular and growing. Every state and the District of Columbia had adopted LLC statutes by 1997. The Limited Liability Company formation has many advantages:
• Offers personal asset protection as members are protected from liability for acts and debts of the company.
• Taxes on profits are passed through members, not at the LLC like a corporation, no double taxes.
• Check box taxation; the LLC can elect to be taxed as a sole proprietor, partnership, S-Corp or corporation, lending flexibility as to tax payments.
• Membership can be limited to a single natural person.
• No required annual general meeting of shareholders, in most states.
• Single manager or provision for a board of directors. No loss of power to a board unless organized with a board.
• LLCs are durable and extend beyond the life of a single individual.
• Much less administrative paperwork and record keeping.
• Membership interest can be assigned providing economic benefits of distribution of profits and losses.

But LLCs are not the magic solution as would first appear, there is a downside as well:
• Earnings of the members are subject to a self-employment tax.
• Partnerships, since LLCs are treated like partnerships for income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
• Loss, if more than 35% of losses can be allocated to nonmanagers, it may lose its ability to use the cash method of accounting.
• LLC’s to be treated as a partnership it needs two or more members, single member LLCs are treated like Sole Proprietorships for tax purposes.
• Conversion to an LLC of an existing business, could result in tax recognition or appreciated assets.

Small Business Formation, License, Contract Attorney & More in Las Vegas, Nevada

Get some good legal advice on this. Once committed, you are married to your decision to a certain extent. Consult a business attorney and a CPA to weigh your choices. Kajioka & Associates Attorneys at Law specialize in business law and can provide the legal guidance you need.

Call Now Button