There are several forms of business entities that govern the operation of various business organizations in the world today. Research asserts that the majority of the large businesses operate either as corporations, partnerships, or limited liability companies (LLC). The main differences among the three entities occur in the formation requirements, mode of operation and dissolution procedures (DeAngelis, 2012).
A corporation form of business ownership is whereby several members form a business organization governed by the articles of incorporation. The article contains procedures that define the identity, operation, and termination procedures among others. Business law defines a corporation as an entity that is separate from the owners. All members forming a corporation must be in agreement during the formulation of the article by signing the underlying principles stated in it. Major components of the association include corporate name, number of authorized shares, corporate physical address, incorporator’s addresses and names. Members are also required to frame by-laws that stipulate the rules and regulations of the corporation (DeAngelis, 2012).
The partnership is a business entity that comprises two or more members governed by the partnership agreement. The agreement is a document that defines the terms and conditions of the partnership. In most cases, the agreement contains profit and loss sharing ratio, the mode of operation, and the role of each member in the partnership. All members forming the partnership must sign the agreement for it to be abiding. According to the business law, the partners have no protection against the creditors’ claim especially in case of bankruptcy. Therefore, creditors are eligible to claim personal assets of the partners in an attempt to settle their debt. However, the law requires the creditors to claim the partnership assets first before proceeding to claim the personal assets of the individual partners (DeAngelis, 2012).
LLC business entity is a combination of the legal feature of corporation and the tax flexibility advantage associated with the partnership. The basic step in forming LLC is drafting the operating agreement among the owners. This agreement defines the internal affairs that govern the LLC. The major component of the agreement is the definition of the various roles of the LLC members. Other functions defined in the agreement are the LLC management structure and procedures regarding membership transfer, withdrawal, and dissolution (Mancuso, 2013).
After the operating agreement, members should write the articles of association. The articles may be drafted with the assistance of an attorney or not especially if there are legal experts among the members. This document contains various organization’s information including the organization name, members’ details like addresses, names, and privileges. Once the article of association is written, the LLC is declared formed unless otherwise stated. The corporate law does not specify the maximum number of members who should form a LLC. However, a minimum of two members is mandatory for a LLC to be formed (DeAngelis, 2012).
Poznak Law Firm Limited, a law company located in Illinois, USA, is an example of a LLC. Its article of association provides terms and conditions that govern its internal affairs. Some of the terms stipulated in the association include business ethics, consultancy, customer protection, contract procedures, copyright protection, debt recovery, and employment terms among others. Poznak owners opted to adopt a LLC form of ownership as opposed to partnership or corporation due to two major reasons. First, they wanted to take advantage of the favourable tax conditions imposed on partnership entity. Secondly, they aimed to utilise favourable legal platforms associated with corporation entity. This is due to the fact that LLC is a combination of the principles found in both partnership and corporation. The hybrid nature of the LLC is advantageous as compared to partnership or corporation forms of business ownership (DeAngelis, 2012).
The main advantage of LLC over the partnership or corporation is the limited liability protection to the members. This regulation protects the member’s assets against the creditor in debt settlement especially after bankruptcy. Limited liability provision considers LLC as a separate entity from the owners. Consequently, in case the LLC becomes bankrupt, the member’s personal assets cannot be revoked by the creditors as the compensation for their owing. Furthermore, there is no double taxation in the LLC business entity. This is due to the fact that the LLC owners should remit taxes both at personal and company level. Consequently, the owners end up paying taxes only once in form of personal income taxes (DeAngelis, 2012).
However, there are several disadvantages associated with LLC business ownership. LLC members are not liable to receive wages from the LLC. The members only receive revenue from the profit appropriation after a specific financial period. In addition, the LLC lifespan depends on the how long the individual members remain in the company. For instance, in most cases the LLC is dissolved once a member is declared bankrupt or dies. This is undesirable especially if the owners aim to go public through selling of shares in future (Mancuso, 2013).
In conclusion, both partnership and corporation form of businesses have unlimited liability. Therefore, creditors can confiscate personal assets of the individual members to settle debts in case of bankruptcy. However, partnership has favourable tax conditions while corporation exhibit conducive legal framework. LLC combines both advantages of partnership and corporation (DeAngelis, 2012). On the other hand, LLC form of business ownership enjoy limited liability. Consequently, the creditors have no right to invade personal assets of the individual member to settle their debts. Therefore, LLC is the most protective form of business ownership (Mancuso, 2013).
DeAngelis, M. (2012). Business Entities. Hartford, Connecticut, USA. Web.
Mancuso, A. (2013). Your limited liability company: an operating manual (7th ed.). Berkeley: Nolo press.