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6/12/07

The Types of Business Organizations Part 2

The other type of business organization is the limited liability organization. These entities can take many forms. These forms are: (1) a limited liability partnership; (2) a limited liability company; (3) a limited liability limited partnership; and (4) a corporation. Note that there are various forms of corporations (such as an S-corporation, a close corporation, and a closely-held corporation), but these are conversations for another day.

Like the unlimited liability entities, these limited liability entities have pros and cons. First, and most obviously, these limited liability companies, as the name suggests, limits your liability. You are liable (some exceptions apply such as piercing the corporate veil) only up to the amount of your investment. Therefore, if you investment two thousand dollars ($2,000) into a corporation, and the company has debts, you are only liable up to your two thousand dollar ($2000) investment.

Second, all of these entities, except a corporation, are not subject to double taxation. Unfortunately, a corporation is subject to this double taxation. For example, if the company makes X amount of dollars, the corporation is taxed on these dollars. In addition to be taxed on that money, any distributions the corporation makes to shareholders is also taxed. Therefore, the same dollar is getting taxed twice.

Last, it is easier to raise capital because you can sell interests in these entities. Whether in the form of stock or units, these entities have a more effective way of raising capital as compare to the unlimited liability companies.

These positives also have some negatives. First, management is not as easy. Most of these entities have various levels of managements (including board of directors and officers) and have to accomplish various formalities (such as annual meetings, recording minutes, and elections by shareholders). These management levels and formalities can slow down progress and may cause conflicts between managers with differing points of views and interests.

Second, many filing fees exist. In addition to having to file a certificate of registration (for a limited partnership), articles of organization (for a limited liability company), or articles of incorporation (for a corporation), you have to file certain papers designating a resident agent and provide annual lists. Additionally, some states may not allow some of these entities to be formed (specifically a limited liability company and a limited liability limited partnership), therefore, you need to check you local laws. All of these requirements can cost hundred, if not thousands of dollars, to file.

Last, there can be conflicting interests (between shareholders, managers, and officers) as to who gets what money. These competing interests can lead to voting issues and well as possible lawsuits. Both of these will cost time and money.

Like with the pervious post, you need to consult an attorney before you try to form any of these entities by yourself. This post is intended to give you a brief overview of some limited liability companies so that you know of some options that exist for your present or future business.

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