Question

Answer the following question in a minimum of two paragraphs.

Bob wants to form a company with Bill but is concern about expenses and taxes. Bill is known to be careless with money and seems to always have debt issues. If you were to advise Bob, what you recommend regarding his options in forming a business (partnership, corporation, Limited Liability Company)? Explain the consequences of your options.

A person named Rein petway answered with  

the most suitable form of business that Bob can choose for his company is an LLC. It is a form suitable for new small businesses that involved more people but require limited liability of each. A partnership firm will not provide limited liability and thus all expenses, liabilities will have to be shared along with the profits and decisions. This will make it difficult to run the business with Bill's careless money spending behaviors. A corporation will provide limited liability advantage but has double taxation involved which will increase the taxation and expenses issue for Bob.

chegg, it is your job to respond to Rein Petways response with at least two paragraph!

Answer 1

In order to provide the best option for the form of business Bob and Bill should indulge in, it's important to primarily understand the financial liabilities of each structure of business outlined, keeping in mind Bill's irrational sense of financial responsibility.

Partnership: If Bob and Bill were to form a partnership firm, both of them would have an equal 'fiduciary responsibility' which means that all their actions need to be in the best interest of the firm and that all partners are liable for the actions which any individual partner takes on behalf of the firm. This form of incorporation also allows creditors to sue any of the partners personally to collect a debt amount if the partnership assets cannot cover the value of the debt. This form of general personal liability would end up putting both Bob's and Bill's personal assets, like house, family bank accounts and others, at risk.

Corporation: Unlike partnerships, incorporating a business results in a separate legal entity that functions independently of its owners. The corporation can run transactions under its own name and the shareholders personally liable for neither the activities of other shareholders nor that of the business debts. A shareholder's financial liability only extends to that of the amount invested in the company by him/her. Creditors are restricted to collecting debt out of only the assets owned by the corporation and are not allowed to sue the individual shareholders to recover the debt.

​Limited Liability Company: LLCs can be considered as hybrid entities combining partnerships and corporations. ​An LLC provides insulation to the owners by separating the business assets of the company from the personal assets of the owners. While there are multiple similarities of the limited liability feature to that of a corporation, the functionality and availability of a flow-through taxation structure to the members of an LLC is an inspiration from partnerships.

Thus, keeping in mind all the liabilities associated with different business ventures, it is a fair possibility to agree with the statement made by Rein Petway, that of all available structures an LLC can provide Bob with the advantages of having a limited liability over the business and therefore of Bill's actions. However, there are mainly two disadvantages that pop up with LLCs which could be of potential damage for both Bob and Bill:

1. Limited Liability of Owners to each other: while LLCs shield owners' personal assets from business debts, it also limits the accountability of owners/shareholders to each others' actions. This further leads me to say that Bob might lose the absolute rights to monitor Bill's handling of business finances especially if there are other shareholders involved. This might not lead Bob to take the complete onus of the business functionalities.
2. "Piercing the Corporate Veil": The owners of the company can lose the protection provided by Limited Liability if a business owner is sued for utilizing business funds for personal use or if the owner mixes the business and personal funds for his/her own gain. Since Bob wants to form the business with Bill, assuming that both of them would be the owners of the company, it would lead to financial liabilities from both owners once the protection provided by Limited Liability is lost in the process.

Hence, keeping the above factors in mind and to be able to solicit a profitable business, there is a more convenient option than LLC - Limited Liability Partnership. General partnership firms have all partners equally responsible for the management and liability of all business operations. However, if certain partners want limited liability in exchange for lesser involvement in the day-to-day operations and functions of the company, the partnership can file a certificate of limited partnership with the state business registrar.

In an LLP, there is one general partner and there can be multiple limited liability partners. The limited liability feature provides protection of the personal assets of partners from the business debt or insolvency claims while the general partner's personal property would still remain at risk. However, one of the biggest advantages is the ability to recruit new partners and discontinue old partners as LLPs have partnership agreements that allow for the addition and retirement of partners.

To sum it up, it is the flexibility - be in operations, liability, flow-through tax structures or partnership agreements, that makes this form of business venture superior to that of an LLC or any other corporate entity.