|
Steve Diamond
sent me the following comment on different types of corporations (including
LLCs, limited liability companies). It may be of interest. -- Jim
Devine
You are asking the classic choice of form question, as it
is put in corporate law. The bottom line is that there has been a
proliferation of forms over the last twenty years after a long period of time in
which it appeared the corporation, partnership and limited partnership would
dominate. With the emergence of variations on these basic forms the
reality is that each offers tremendous flexibility to entrepreneurs so that an
LLC and an LP and an LLLP can often accomplish similar goals. The LLC is
typically the most flexible with state statutes giving wide latitude to the
founders to draft an LLC agreement tailored to fit their management
goals.
But let me back up and make some more basic points.
Two issues traditionally are thought to drive the choice of form: limited
liability and single level taxation. Shareholders in a corporation
enjoy limited liablity - they cannot be held personally liable for the the debts
and torts of the corporation; the can only lose their original investment
in the company. On the other hand, corporations face what is seen,
normatively, as "double taxation" - corporate income is taxed at the corporate
level and then, if there is a distribution to shareholders, they will face a tax
on what they receive as ordinary income.
Partners, on the other hand, face personal
liability for torts and for the contracts they enter into but avoid double
taxation - all the profits of a partnership are distributed each year and the
partners face ordinary income tax.
Limited Partnerships enable a partnership type entity to
be formed with the advantages of partnership without the disadvantage of
personal liability. They are very common in the world of private equity,
such as hedge funds. The limited partners invest money while a general
partner manages the entity. The general partner faces the personal
liability as s/he would in a normal partnership while the limited partners face
only limited liablity.
LLP's are variations on the partnership form that retain
single level taxation but remove personal liability. They are limited by
state statute to certain professions such as law firms and accounting
firms.
LLC's are an attempt to create a form with management
characteristics reminiscent of a corporation - efficient centralized
management - but retain limited liability. "Members" join the company
rather than shareholders, typically. Because of the flexibility in the
statutes mentioned above some professional firms prefer this model. IT is
also a very easy form to set up and works quite well for small firms or former
sole proprietorships. Thus, a local electrician might be better off
setting up a simple LLC to provide the shield of limited liability for possible
tort or contract actions.
Stephen F. Diamond
Assistant Professor of Law
School of Law, Santa Clara University Santa Clara, CA 95053 Email: [EMAIL PROTECTED]
|
