Question

Describe the application of partnership provisions to limited liability companies (LLCs).

Answer 1

The LLC rises from the business owner's desire to adopt a business structure permitting them to function like a traditional partnership. Their goal was to distribute income to the partners but also to protect themselves from personal liability for the business's debts, as with the corporate business form. In general, unless the business owner establishes a separate corporation, the owner and partners assume complete liability for all debts of the business.

Under the LLC rules, however, an individual isn't responsible for the firm's debt, provided he or she didn't secure them personally, as with a second mortgage, a personal credit card or by putting personal assets on the line.

The LLC offers a number of advantages over other forms  For example, while corporations can issue only one class of the company stock, LLCs can offer several different classes with different rights. In addition, corporations are limited to a maximum of 75 individual shareholders (who must be U.S. residents), whereas an unlimited number of individuals, corporations, and partnerships may participate in an LLC.

The LLC also carries significant tax advantages over the limited partnership. For instance, unless the partner in a limited partnership assumes an active role, his or her losses are considered passive losses and cannot be used as tax deductions to offset active income. But if the partner takes an active role in the firm's management, he or she becomes liable for the firm's debt.

Since the LLC is a new legal structure for businesses, federal and state governments are still looking at ways to tighten regulations concerning them. Unfortunately, some investment promoters use LLCs to evade securities laws.