Key Features of Limited Liability Companies and Partnerships
Limited liability is a feature describing an amount invested in a company or partnership. Shareholders can claim ownership up to the amount they have invested in a business. General partners, on the other hand, have an unlimited liability.
If customers, partners, or third parties file a lawsuit, they are suing the partnership/company and not the investors or stockholders. They are not liable for loans and other debts that the company has. Unlike them, investors, owners of general partnerships, and sole proprietors are liable for business debts.
Features of Limited Liability Companies
LLCs combine features of corporate businesses and sole proprietorships. They dissolve in case of bankruptcy or the death of a partner while corporations can continue their operations if any of these happens. The company is dissolved if a partner leaves. The other members can start a new company or partnership.
There are certain advantages to incorporating an LLC. One is that the partners can choose how to be taxed – like a C or S corporation, partnership, or sole proprietorship. Double taxation does not apply. Another advantage is that LLCs have less record keeping, including supporting documents, records, books, and reports. Corporations are not required to hold quarterly or board meetings. The owners are not responsible for poor financial, management, and legal decisions made by one partner. In addition, the partners can choose how to distribute the profits. Investors have no or little say in the normal operations of the company, unless specified in the operating agreement. The requirements for running an LLC are not as strict as that for corporations, which gives businesses more flexibility.
Disadvantages of LLCs
While double taxation is not an issue, all shareholders and owners must report losses and profits in their tax returns. This is done regardless of whether they receive dividends and is called pass-through taxation. LLCs also pay additional taxes in some jurisdictions. These include capital values or franchise tax. They also pay excise and sales taxes similar to other types of businesses. In addition, the partners pay self-employment tax contributions because they are considered self-employed.
Incorporating an LLC
There are several steps to follow, and the first is to choose a business name. The next step is to file the articles of incorporation, which include details such as the names of the partners, address, company name, and others. Depending on the jurisdiction, the company may have to file with the Department of Commerce, the Corporation Commission, or another agency. The third step is to develop an operating agreement which outlines the structure, financial matters, regulations, and operations. The agreement specifies the responsibilities of the partners, their rights, and the way losses and profits are recorded and allocated. As a next step, the partners should obtain all permits and licenses, required for the specific sector. They may vary in different municipalities and states. Finally, the company should hire employees and workers and announce the start of its operations. The requirements vary, and it is best to contact the local filing office for more information.
Differences Between LLPs and LLCs
A limited liability partnership is one type of arrangement under which the partners enjoy a degree of protection from liability. It is not considered a separate entity, meaning that the partners must report losses and profits. The partners are not responsible for employee negligence. However, they are liable for the actions of workers who are under their supervision. In addition, the partners are liable for debts owed to landlords, financial institutions, and businesses. In some countries and jurisdictions, LLPs must have one or more general partners. Existing and new businesses with two or more partners can establish an LLP.
There are certain disclosure requirements that partnerships must follow. They should notify of any changes to residential addresses, membership, member names, and registered addresses. In addition, they should file annual returns. Partnerships also have designated members who are assigned duties and tasks such as filing and signing of annual accounts and filing annual returns. Finally, LLPs should present a statement of liabilities, debts, and assets in case of insolvency.
According to proponents, LLPs combine the best features and practices established by partnership and company low. Critics note that this form may actually confuse principles, making it more difficult to operate as a coherent entity. They also claim that an LLP is not a suitable arrangement for small businesses. For investors, limited liability partnerships involve risk and higher costs.
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