Question

Explain Any Two Types Of Hybrid defenses in relating to law Of business.

Answer 1

Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid business structure allowed by state statute. LLCs are attractive to small business owners because they provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Each state may use different regulations, and you should check with your state if you are interested in starting a limited liability company.

Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.  

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Forming an LLC

While each state has slight variations on forming an LLC, they all adhere to some general principles:

Choose a Business Name. There are three rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and “insurance”). Your business name is automatically registered with your state when you register your business, so you do not have to go through a separate process.

File the Articles of Organization. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. For most states, you file with the Secretary of State. However, other states may require that you file with a different office such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code.

Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is highly recommended for multimember LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities, and other provisions.

Obtain Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state, and locality.

Announce Your Business. Some states, including Arizona and New York, require the extra step of publishing a statement in your local newspaper about your LLC formation.

LLC Taxes:

In the eyes of the federal government, an LLC is not a separate tax entity, so the business itself is not taxed. Instead, all federal income taxes are passed on to the LLC’s members and are paid through their personal income tax. While the federal government does not tax income on an LLC, some states do, so check with your state’s income tax agency.

Since the federal government does not recognize LLC as a business entity for taxation purposes, all LLCs must file as a corporation, partnership, or sole proprietorship tax return. Certain LLCs are automatically classified and taxed as a corporation by federal tax law.

Advantages of an LLC

• Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability—members are not necessarily shielded from wrongful acts, including those of their employees.
• Less Record Keeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S Corporation, there is less registration paperwork and there are smaller start-up costs. However, it is very important to keep proper and separate business financial records. If it appears that the LLC is co-mingling personal and business funds, it can be legally reclassified and end up assuming additional liability.
• Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.

Disadvantages of an LLC:

• Possible Limited Life. When an LLC is formed, the members must decide on the duration of the LLC. If an LLC is formed in a state where perpetual life is not permitted, then the death or disassociation of a member will dissolve the LLC, and the members must fulfill all remaining legal and business obligations to close the business. For this reason, it is important for individuals seeking to use this form of ownership verify the requirements for an LLC in the state in which they intend to operate.
• Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. Some states require one partner to be a “general partner” with unlimited liability, meaning he/she is ultimately responsible for the debts of the business and for any lawsuits such as personal injury or breach of contract. Unlike corporate shareholders, the partners have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who, as “corporate” individuals, then have the legal responsibility to manage the corporation in the corporation’s best interest. An LLP also has a different level of tax liability compared with that of a corporation.

As in a partnership or limited liability company (LLC), the profits of an LLP are allocated among the partners for tax purposes, avoiding the problem of “double taxation” often found in corporations.

Characteristics and Features of an LLP:

1. LLP is a blend of body corporate and a separate legal entity from its partners which has a perpetual succession;

2. LLP can own assets in its own name, and can also sue and be sued;

3. The partners of LLP have the right to manage the business directly, unlike the corporate shareholders which thereby means no Owner/ manager distinction;

4. Every LLP shall have at least 2 partners and there is no limit for the maximum numbers of partners. The partners to LLP can be an individual as well as body corporate;

5. One partner is not responsible or liable for another partner's, misconduct or negligence;

6. LLP should be formed with a profit motive; 7. The rights and duties of partners in an LLP are to be governed by the agreement between partners. The duties and obligations of Designated Partners shall be as provided in the law;

8. Partners of LLP are liable only to the extent of their contributions in the LLP

9. Every LLP shall use the words "Limited Liability Partnership" or its acronym "LLP" as the last words of its name;

Benefits and Advantages of LLP alluring start -ups:-.

There is no limit on number of owners of LLP

LLP requires minimum 2 partners but there is no limit on maximum number of partners unlike a private limited company wherein there is a restriction of not having more than 200 members.

Lower cost involved in formation of LLP

The cost of registering LLP is low as compared to cost of incorporating a private limited or a public limited company.

No requirement of conducting compulsory Audit in case of LLP

All the companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. A Limited Liability Partnership is required to get their accounts audited only if:-

a) If the paid up capital of the LLP exceeds Rs. 25 Lakhs, or

b) If the annual turnover of the LLP exceeds Rs. 40 Lakhs

Lower compliance burden as compared to other forms of business structure

In case of Limited Liability Partnership, the only requirement is to file the Annual Return & a Statement of Accounts & Solvency as compared to other forms of entities which require large number of compliances.

Easy to windup

It is not only easy to start a LLP; it is also easier to wind up the same as compared to other business entities.

Procedure for incorporating a Limited Liability Partnership :

1. To incorporate a Limited liability Partnership, all designated partners of the proposed LLP shall obtain "Designated Partner Identification Number (DPIN)" by filing an application individually online in E-Form DIR -3 with Ministry of Corporate Affairs. In case any of the desired partners obtain Director Identification Number (DIN) then the same can be used as a DPIN.

2. The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. As such, all filings done by the Limited Liability Partnership (LLP) are required to be filed with the use of Digital Signatures by the person authorized to sign the documents.

Acquire DSC- The person authorized to sign the documents is required to obtain Digital signature certificate (DSC) the same can be acquired by a Certifying Authority, who has been granted a license to issue a digital signature certificate under section 24 of Indian Information Technology Act 2000.

Register DSC- After acquiring Digital Signature Certificate, the role check can be performed on MCA portal only once the signatories have registered their Digital Signature Certificates with LLP application.

3. To file an e-form or to avail any services on LLP portal, it needs to first require registering as a user in the relevant user category, such as registered and business user.

4. To apply for name of the proposed LLP to be registered, Form 1 for application for reserve tion or change of name to be filed with MCA Portal. Once the name is reserved for proposed LLP, Form 2 needs be filed for incorporation of the LLP along with required documents. Once the form is approved by the concerned official of the Ministry, an email regarding the incorporation and status of the form will changed to "Approved."

5. After incorporation of LLP, an initial LLP Agreement is to be filed within 30 days of incorporation of the Limited Liability Partnership. Form 3 shall be filed for the information with regard to Limited Liability Partnership and Changes, if any made in the agreement.