Limited Liability Partnership - Coursework Example

Limited Liability Partnership Introduction This paper is an attempt to understand limited liability partnerships businesses in compare and contrast with other forms of businesses. Therefore, it becomes vital to discuss the different other types of businesses and their characteristics. This is why this section of the paper focuses on briefly discussing the other types of businesses which would build a basis for the next section of the paper were the core discussion regarding Limited Liability Partnerships would take place. This paper would start by discussing the simplest form of business, which is sole proprietorship or sole trader firm. These businesses are the most common and simplest ones since they just have one owner who runs the business by himself and is self employed. These types of businesses are east to start since they do not require much, if not any, legal obligations, and paperwork. It is important to note that the sole trader assumes the “all” the responsibility of the business. This includes looking after all the operations, issues, debts, loans and others. The problem with this business is that the sole trader has unlimited liability for the business and in case of bankruptcy, the sole trader would have to pay off the debts and claims from his pocket or by selling off the company’s assets and the sole trader’s assets as well (Hicks & Goo, pp. 13-18). Important here to note that the law does not provide the sole trader’s company, the status of a “separate legal entity” which other forms of business enjoy having. These businesses do not have the option of equity financing or in simple words issuing bonds and stocks for raising capital. Moreover, if the sole trader goes for debt financing, even then, the loan would be on his name and not on the company’s name and he, not the company, would be liable for paying off the loan (Mancuso, pp. 65-69). The second type of business would be of partnerships where two or more partners jointly start their business and share the responsibilities and ownership of the business. Unlike sole proprietor where only one person is responsible for everything, in partnerships, all the partners share the responsibility of running the business. However, their liability remains unlimited. This is because of the fact that partners are liable for any decision whether taken by him or any other partner. Moreover, if one partner runs away than the rest would have to pay his or her debts liabilities from their pockets (Martin, pp. 41-49). These types of businesses are easy to form and easy to dissolve as well and both of these can happen with the mutual consensus of the partners (Griffin, pp. 52-29). These types of businesses provide a flexible organizational structure and higher capability to raise capital. However, personal problems and differences in vision, goals, commitments, and others can cause significant problems and delay in decision-making process (Hicks & Goo, pp. 13-18). Moreover, if one partner leaves the business, dies or is unable to continue the partnership due to any reasons or a new partner joins the business, then the partnership automatically comes to end. Every now and then, we read the word “limited” at the end of a company’s name. It indicates that the liability of the members of the company is limited. A Limited company can be either a “private limited company” or a “public limited company” and it can be “Limited by shares” or “Limited by guarantee” (Griffin, pp. 52-29). The most common of them are companies that are limited by shares. They operate by appointing of board of directors, which usually are the major stockholders of the company or they are neutral people from outside and based on their skills major stockholders of the company appoint them. A company limited by shares is usually least bothered about financing because many people readily buy shares and invest in their money in companies. These companies do enjoy the status of “separate legal entity” and comprehensive and complicated paper is required before the establishment of these companies. These companies have to register with the business governing bodies of their respective regions and make sure that they adhere to all the rules of the Companies Ordinance or Business Law. Discussion As the name suggests, limited liability partnerships seem to be a middle way or a mix of partnerships and limited business. According to the United Kingdom Limited Partnership Act of 1907, a limited partnership would have two types of partners: limited and general partners (Griffin, pp. 12-21). Limited partners are the ones who contribute a fixed sum of amount in the business. They receive a fixed amount of return on their investment, most probably according to the ratio of their investment and they do not have unlimited liability (Mancuso, pp. 3-7). However, the general partners act as the usual partners and assume the responsibility of all debts and obligations of the money (Hicks & Goo, pp. 13-18). Limited partners cannot draw back their money until and unless the dissolution of the business and they cannot take part in the management of the businesses as actively as the general partners can (Griffin, pp. 12-21). Moreover, if the limited partners violate any of the above-mentioned clauses they automatically become liable for the amount drawn back as the general partners. These businesses offer plenty of advantages over the other forms of businesses and this explains the reason behind their growing popularity and acceptance. The biggest advantage that these businesses offer, as the name suggests is the advantage of “limited liability” (Martin, pp. 41-49). Unlike general partnerships where the liability of the members is unlimited, limited liability partnerships limit the liability of the partners to the extent or level of their investment in their business (Griffin, pp. 52-29). This means that by suing the company for defaults or any reason would only recover the amount of investment from that partner but would have no right to touch the personal assets or savings of the limited partners. This decreases the financial risk of investing money in business and makes its more secure (Mancuso, pp. 65-69). This is reason why it becomes so easy to find interested and prospective investors for the business. In addition, limited liability partnership also have the freedom to allocate profits and shares in earnings based on other factors that may seem fit for the situation and the company, other than the share of investments (Sealy & Worthington, pp. 78-82). Moreover, partners are also not responsible for the negligence and liability of other partners, however this does not happens in all cases are there are some exemptions to it as well (Hicks & Goo, pp. 13-18). The other second advantage relates to the paperwork and legal requirements. Unlike other limited companies, which have to abide by all the laws of companies ordinance, provide a memorandum of association, articles of association, prospectus, balance sheets, and income statements and go through comprehensive and sophisticated paperwork (Hicks & Goo, pp. 13-18), limited liability partnerships enjoy lesser paperwork and formalities. In fact, this also gives limited liability partnerships the freedom of “unlimited capacity” which indicates that it can jump into any business it wants and no memorandum of association or articles of association have the capacity to restrict them from any business until and unless that is legal and understandable (Griffin, pp. 52-29). Changing the course of action in business is quite a problematic process for other companies who have to pass a resolution in their board of directors meeting, inform all their shareholders, change the memorandum of association and articles and so on (Sealy & Worthington, pp. 78-82). Moreover, many laws, which to limited companies are not applicable on, limited liability partnerships. In fact, the only laws that limited liability partnerships have to take care of are those that guide dealings with third party, making sure that they are aware of company’s status, names, operations and others (Mancuso, pp. 3-7). Another advantage associated with this form of business is that they do not have to go through “Double Taxation” like corporations. Unfortunately, the profits earned by the members of a corporation go through double taxation. Firstly, the tax applies to the company’s profits, which is quite significant, more than 40 percent in many countries (American Bar Association, pp. 41-49). Secondly, when these profits distribute amongst the members, it becomes the income of the members and they are give income tax on the same. This is quite a painful process and limited liability partners enjoy exemption from this (American Bar Association, pp. 41-49). Moreover, this one of the prime reasons why people seem to be in love with limited liability partnership are more recently there have been many new additions to this list. The fourth advantage could be of managing the company. Limited company requires appointing a board of directors and following of a specific set of rules and regulations for their appointment, remuneration, firing, retirement, code of conduct, and others. Rather than appointing people from outside, Limited liability partnerships allow the partners as the owners of the company to directly manage and look after all the operations of the company and make any changes as per the requirements (Martin, pp. 41-49). As mentioned earlier in the paper, that partnerships have the benefit of having a flexible organizational structure and same is the case with limited liability partnerships. Since there are no sophisticated and detailed laws for making the organizational structure, partners as the owners can come up with their own structure, chain of command, managerial positions and ranks, hierarchy, departments and others (Mancuso, pp. 3-7). More importantly, many countries and states also treat limited liability partnership businesses as a “separate legal entity” and differentiate between them and the owners for the company. It means that the company can be sued in its individual capacity, and the company is different from its owners and partners. This provides the partners or owners with a much legal protection and backing (Sealy & Worthington, pp. 78-82). However, important here to note is that this rule is not applicable in all countries and different countries have different arguments over this issue. Unlike other partnerships, limited liability partnerships also offer the flexibility of any partner leaving the business at any point in time. As mentioned earlier in the paper that a partnerships usually dissolves automatically when any partner leaves the business due to any reasons (Mancuso, pp. 65-69). However, this is not true for limited liability partnerships where the business continues even if any partner leaves at point in time. Moreover, it is also easy to convert any company into limited liability partnership at any point in time. Conclusion Therefore, it is quite understandable to conclude that limited liability partnership have some distinct advantages due to which many business people these days prefer limited liability partnerships as their type of businesses. However, there are a couple of things, which are necessary to keep in mind while making this decision. Firstly, there is a great disparity amongst the laws for limited liability partnerships in different countries and states since this is relatively new phenomenon. Therefore, it is important to consider the regional and state laws before making this decision (American Bar Association, pp. 41-49). Secondly, they only serve as the best option when a company does not want to issue shares and bonds because the capital raising would happen by the contribution of the partners. However, if the partners do not have enough cash or assets for the business then limited liability partnership is not the best option (Mancuso, pp. 65-69). In conclusion, the paper has analyzed some of the important aspects of Limited Liability Partnership. In addition, the researcher recognized and examined various researches related to the topic but it is expectation that more studies on this topic will enable a wide-ranging and updated understanding of the topic. Finally, it is anticipation that the paper will be valuable for students, teachers, and professionals in better understanding of the topic. Works Cited American Bar Association. Prototype limited liability partnership agreement. American Bar Association, 2003. Griffin, Stephen Company law. Pearson Longman, 2006. Hicks, Andrew, & Goo, S. H. Cases and materials on company law. Oxford University Press, 2008. Mancuso, Anthony. LLC or corporation? How to choose the right form for your business. Nolo, 2008. Mancuso, Anthony. Form Your Own Limited Liability Company. Nolo, 2009. Martin, Alson R. Limited Liability Company & partnership answer book. Aspen Publishers Online, 2000. Sealy, L., & Worthington, Sarah. Cases and Materials in Company Law. Oxford University Press, 2007. Read More