Part 9- Partnerships, Chapter 37: Introduction to Forms of Business, Doc 2

Summary: Business Forms and Partnerships Advantages of LLCs      Limited Liability: Protects members from personal liability for business debts and obligations. Flexible Management: Can be member-managed or manager-managed, similar to corporations. Tax Flexibility: o Can choose to be taxed like a partnership (pass-through taxation) or a corporation. o No restrictions on the number or type of owners, unlike S Corporations. Continuity: LLCs do not dissolve upon the death, retirement, or bankruptcy of a member unless specified in the agreement. Transferability: Membership interests are not freely transferable without the consent of other members unless otherwise stated in the operating agreement. Professional Corporations    Liability: Shareholders have limited liability for business obligations (e.g., leases) but retain unlimited liability for their professional malpractice. Shareholder Restrictions: Typically, only licensed professionals in the same field may be shareholders. Tax Options: Can choose to be taxed as a corporation or elect S Corporation status. Comparison of Business Forms: 1. Sole Proprietorship: Simple formation, but owner has unlimited liability. 2. Partnership: Easy to form, shared control, but partners have unlimited liability. 3. LLP: Similar to partnership but offers limited liability to all partners, except for personal malpractice. 4. LLC: Combines the liability protection of a corporation with partnership tax benefits and management flexibility. 5. Corporation: Offers strong liability protection and capital-raising ability but may face double taxation unless it elects S Corporation status. 6. S Corporation: Avoids double taxation but is limited to 100 shareholders and one class of stock. 7. LLLP: Like an LP but extends limited liability to general partners. Partnerships and Their Evolution:   Historical Context: Partnerships date back to ancient civilizations, regulated as early as Hammurabi's Code and Roman law. Modern Law: Governed in the U.S. by the Revised Uniform Partnership Act (RUPA), which standardizes partnership law and allows flexibility through agreements. Formation and Characteristics:     Formation: Requires no formalities; partnerships can arise by default when two or more individuals conduct business together. Management: Partners share management rights and profits but also share liability for debts and torts. Taxation: Partnerships are not taxed as entities; income and losses pass through to partners’ individual tax returns. Transferability: A partner’s interest is not freely transferable without the consent of other partners. Ethical Considerations in Choosing Business Forms: 1. Limited Liability and Control: o Question: Is it ethical for business owners to avoid personal liability while maintaining full control of the business? o Argument: Limited liability incentivizes entrepreneurship by protecting personal assets, but some argue it could encourage irresponsible risk-taking. 2. Tax Minimization: o Question: Is it ethical for owners to select business forms and tax treatments solely to reduce tax liability? o Argument: While legal, some may view aggressive tax avoidance as undermining societal responsibilities. 3. LLP vs. Partnership: o Given the availability of LLPs, choosing a traditional partnership may expose partners to unnecessary personal liability. Some may question why partnerships persist when LLPs offer similar benefits with better liability protection.