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Liability - Case Study
Marketing Management (2020)
Hebron University
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Hebron University
MBA Program
FINANCIAL MANAGEMENT AND BUDGET
To-DR: Nael SayedAhmad.
From-Shireen Al-Qawasmeh.
Subject-
ORGANIZATION LIABILITY.
2
nd
2019 - 2020.
Liability
One of the most common reasons that entrepreneurs choose an LLP is because of the reduced liability of each partner. Only the individual responsible for the issue is held liable if a lawsuit is brought about. This includes things like unpaid debts and harm caused as result of negligence. When this occurs, the non-responsible partner(s) can avoid repercussions of the lawsuit.
For this reason, LLPs are popular in the medical, legal, and financial industries. The structure of the business prevents the other partners from being held liable which is beneficial for things like malpractices lawsuits. It is important to note that if the partnership as a whole signed contracts or agreed to a particular debt, all the partners can be held financially responsible.
If you have questions or concerns regarding what is LLP, you can post your legal need on UpCounsel’s marketplace. Only the top 5 percent of lawyers are accepted to UpCounsel’s site. The average amount of legal experience of UpCounsel members is 14 years, which includes working with top companies like Google, Menlo Ventures, and Airbnb.
A limited liability partnership (LLP) is a type of organization that allows the layout of the business to be structured in a non-traditional manner while reducing the liability of its owners. This type of operation also allows owners to function at the same level and status within the company.
LLPs are entities of two or more individuals that come together with the purpose of creating a legal partnership to provide good or services while limiting each person’s financial risk. In some cases, the only potential loss for a person is the financial investment they’ve made to start the business. However, this is dependent on the state in which they live and the formation documents.
The liability level of each partner in an LLP is dictated by their state government. While some territories provide reduced liability for all types of potential risks, others only limit it if a failure or loss is caused by a negligent partner.
While there isn’t a limit to the number of partners that can take part in an LLP, there is a minimum requirement of two people. There’s also not
that limit liability but provide more thorough protection to the owners.
An LLP is a great option for many groups of individuals who want to start a business, but it won’t work for everyone. It’s important to consider both the advantages and disadvantages of a partnership before choosing your business structure.
LLP VS Traditional Partnership Firm
The main difference between an LLP and a traditional business partnership is legal liability. In a normal partnership, all partners hold the exact same amount of liability regardless of negligence. LLP removes this responsibly from non-offending partners, and it also prevents each partner from losing more than the amount agreed upon in the original documents. These stipulations also apply outside of the partnership and include issues not related to the business.
What is an LLC?
Simply put, an LLC is the least complex business structure. Unlike an s corp or c corp, the structure of an LLC is flexible. Starting an LLC also gives you the perk of pass-through taxes, limited liability (obviously), and legal protection for your personal assets. Plus the added benefit of looking more legit than the other guys. 2
“LLC” stands for “limited liability company,” and “LC” stands for “limited company.” They are basically the same thing, but different states call them different names. We will refer to both entities as an “LLC” in this article. LLC’s can be member-owned (which means the owners are passive members and hire separate, salaried management) or member-managed (which means the members manage the business, as well as own it). An LLC is essentially a hybrid corporation and partnership. Almost every state has adopted some version of an LLC, and it provides all the benefits of a partnership with the limited liability, taxation benefits and stock transferability of an S corporation. Nonresident aliens can be shareholders, and members can manage their business without risking
2 Incorporate, starting ABusiness ,Overview, What is an LLC (Limited Liability Company)?link: incorporate.
personal liability. Thus, to summarize, an LLC has all the benefits of an LLP and an S Corporation, with the protection from liability that a C corporation has. As you can imagine, this is a very popular business type. Finally, in many states, sole-owner LLC’s are allowed. This means that, unlike a partnership, which requires at least two people, one person can often go into business all by himself/herself and still have an LLC (this is not the law in all states, however). There are three drawbacks to an LLC. First, LLC members have to observe some business formalities. They do not have to observe as many formalities as a C corporation, but they still should have meetings, keep minutes, etc. Second, LLC shares are not publicly traded. That means that, like an S corporation and an LLP, your business can grow quite strong, but it will never amass the capital of Google or Microsoft until it is publicly traded, which only C corporations can do. Finally, the biggest drawback of an LLC is that the law covering LLC’s from state to state can be quite different. Thus, an LLC may be an excellent choice for a business that is located primarily in one state, but businesses that are looking to operate in several states often choose an LLP, because the laws are more or less the same in each state. This makes important business decisions easier for business owners who have operations in many states. An LLC is one of the best business options for resident and nonresident aliens deciding to create a business in the United States. Aliens who want limited liability and the right to manage their businesses cannot find that mutual ability in an LP or an LLP. For alien who are going to start off with a small business, a C corporation may not be necessary at first. Nonresident aliens are not allowed to own an S corporation precisely because they are nonresident aliens. But an LLC provides all aliens (resident and nonresident) with limited liability, protecting their personal assets, and allows active management of their businesses. So a lot of our clients decide to make an LLC. 3
####### 3 ZHANG & ASSOCIATE,P, US IMIGRATTION ATTORNEYS AND CONDELORS,
Limited Liability Company (LLC) &: Limited Company, hooyou
How to Create an LLC (Limited Liability Company):
- Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
- Draft and file your Articles of Incorporation with your Secretary of State.
- Decide who will run the business (managers or members).
- Decide how many owners will be part of the LLC.
- Apply for a business license and other certificates specific to your industry.
- File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
- Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes.
What Is a C Corporation?
It's the most common type of corporation in the U. – and with good reason. C corporations (c corps) offer unlimited growth potential through the sale of stocks, which means you can attract some very wealthy investors. Plus, there is no limit to the number of shareholders a c corp can have. 5
Advantages of a C Corporation
There are many benefits of a c corp. Below are just a few that stand out.
Limited liability. This applies to directors, officers, shareholders, and employees. Perpetual existence. Even if the owner leaves the company. Enhanced credibility. Gain respect among suppliers and lenders. Unlimited growth potential. The sky's the limit thanks to the sale of stock. No shareholders limit. However, once the company has $ million in assets and 500 shareholders, it is required to register with the SEC under the Securities Exchange Act of 1934. Certain tax advantages. Enjoy tax-deductible business expenses.
5 Incorporate, starting A Business ,Overview, What Is a C Corporation? link: incorporate.
Disadvantages of a C Corporation
Double taxation. It's inevitable as revenue is taxed at the company level and again as shareholder dividends. Expensive to start. There are a lot of fees that come with filing the Articles of Incorporation. And corporations pay fees to the state in which they operate. Regulations and formalities. C corps experience more government oversight than other companies due to complex tax rules and the protection provided to owners from being responsible for debts, lawsuits, and other financial obligations. No deduction of corporate losses. Unlike an s corporation (s corp), shareholders can't deduct losses on their personal tax returns.
C Corporation vs. S Corporation
Both c and s corps offer limited liability protection. Both require Articles of Incorporation to be filed. And both comprise shareholders, directors, and officers. There are lots of similarities, but they differ in the complex realm of taxation and corporate ownership.
As we mentioned above, c corps are subject to double taxation while s corps are pass-through tax entities, allowing them to avoid being taxed at the corporate level and again on shareholders' personal income taxes.
When it comes to corporate ownership, c corps have no restriction on ownership, which goes back to our point about them having unlimited growth potential. But s corps don't have that luxury as they're restricted to no more than 100 shareholders. Also, s corps cannot be owned by a c corp, others corps, LLCs, partnerships, or many trusts. But a c corp has no limits on who or what can be a shareholder. Compare corporations and LLCs with our business comparison chart. 6
How to Form a C Corporation
- Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
- Draft and file your Articles of Incorporation with your Secretary of State.
- Issue stock certificates to the initial shareholders.
6 Incorporate, starting A Business ,Overview, What Is a C Corporation? link: incorporate.
Limited ownership. An s corp may not have more than 100 shareholders. Formation and ongoing expenses. It is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Tax qualification obligations. Mistakes regarding the various filing requirements can accidentally result in the termination of s corp status. Closer IRS scrutiny. Payments to employees and shareholders could be distributed as either salaries or dividends. Each are taxed differently, which is what leads the IRS to scrutinize that distribution more closely.
S Corporation vs. C Corporation
What is an s corp?
As we described above, an s corp is something like the lite version of a c corp. That is, when you consider its growth potential and organizational structure.
Every business that files for corporation is first classified as a c corp. Once that's complete, you have to then file for subchapter s corp status and meet all requirements for an s corp – namely, have fewer than 100 shareholders who are all individuals, not corporations; have only one class of stock; and be owned by U. citizens or resident aliens. All of which are pretty easy requirements for most small businesses.
Back to the perk of saving money. An s corp is not subject to double taxation as a c corp is. That means that an s corp's revenue is not taxed at the corporate level. It's only taxed when paid out as salaries or dividends to shareholders. That alone could save an s corp hundreds of thousands of dollars. For this reason, a c corp makes very little sense for a small business. But if you opt for an s corp, make sure you have a solid accountant as one mistake in filing can send your company back to c corp status, leaving it open to be taxed twice.
How to Start and Form an S Corp
Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
Draft and file your Articles of Incorporation with your Secretary of State.
Issue stock certificates to the initial shareholders.
Apply for a business license and other certificates specific to your industry.
File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
File the IRS form 2553 within 75 days of your corporation formation.
LP and LLP
LP and LLP mean almost the same thing, with the difference being whether limited partners can participate in management. These kinds of partnerships are generally designed for partners who are engaged in the same type of profession, such as a law firm or an accounting firm. 8
1. Limited Partnership (LP)
An LP is a form of partnership that has two types of partners: a general partner and limited partners. There has to be at least one general partner and at least one limited partner in every LP. The general partner manages the operation of the LP. In addition, general partners are personally responsible for the liabilities of the LP. They are entitled to their share of the profits, which is determined and agreed upon in the partnership agreement. Their role is the same as that of general partners in a general partnership. General partners can be natural persons or legal entities. Therefore, businesses often use an LLC or a
8 Upcounsel, LLC vs LLP: Everything You Need to Know.
link: upcounsel.
What are the benefits of an LP or LLP?
There are pros and cons of starting a limited partnership or limited liability partnership. Some of the pros are, first and most importantly, limited liability for the limited partners in an LP. These partners can contribute the capital in a partnership without risking their personal assets. In an LLP, the liability is limited only for partners who did not participate in creating the problem or the debt. Also, there is no double taxation in LP’s and LLP’s. Double taxation happens in corporations because the corporation pays income taxes on its profits, and then uses the remaining profits to pay dividends to shareholders, who again pay their own individual income tax on it. Thus, the same profit gets taxed twice. However, with partnerships, the partners themselves are taxed on their personal income tax returns for their share of ownership in the partnership, which usually amounts to less taxation.
What are the drawbacks of an LP or an LLP?
First of all, there is no limited liability for the general partner in an LP. There is also no limited liability for the partners in an LLP who participate actively in management and take big business risks. For either the general partner in an LP, or the risk-taking partner in an LLP, creditors can reach their personal assets. Second, the shares in a partnership cannot be publicly traded on the stock market. Publicly trading shares on the stock market is how most big companies go from small companies to large companies. For example, companies like Google and AT&T are publicly traded companies. This means that if you have an LP or LLP you limit your growth potential. However, your company can still become quite profitable, just likely not as enormous as Google and AT&T. Finally, if limited partners in an LP try to become active in the business they risk being seen by the law as general partners, in which case, they too risk personal liability. Thus, if they want to always be seen as limited partners, they must not interfere too much in business operations, even if they disagree with the decisions of the general partner. 10
####### 10 ZHANG & ASSOCIATE,P, US IMIGRATTION ATTORNEYS AND CONDELORS,
Limited Liability Company (LLC) &: Limited Company, hooyou
Liability - Case Study
Course: Marketing Management (2020)
University: Hebron University
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