Question

Case 3: Choice of Business Entity (Mallor 16th Ed. p. 990) After working for a large company for 10 years, you decide to give expression to your entrepreneurial urges and start a business. Your business plan is to help small firms that are struggling with finding ways to make new information technologies affordable and effective for their business. You envision that your business will need a capital infusion of $500,000 for the first year, during which you project the business will have a net loss of $200,000, which reflects in part your salary of $80,000. Beginning with the second year, you believe that the business will generate enough cash flow to finance internally all its normal capital expenditures. You expect second-year losses to be $100,000. Beginning with the third year, the business will be profitable. You have $120,000 of savings that you are willing to invest in the business. You hope to obtain the remaining $380,000 of initial capital from investors. While you are willing to give a portion of the equity of the business to the investors, you want to control the business, including day-to-day operations. It is especially important that the other investors not be able to expel you from the business or its management. 1. Although any business form may be adapted to the needs of your new business, the business forms that fit best are the LLC and LLLP. 2. If the LLC is chosen, both you and the other investors in the new business should elect to become a member managed LLC and name yourself and the other substantial investors members of the LLC. 3. While the limited partnership will also work, the LLLP is better, because it grants limited liability to the general partner, if that form is chosen, and, if you are the general partner, you retain control of the business. 4. The new business should not be conducted as a corporation, because, while you will attain limited liability as a shareholder, you will be unable to retain control over the business if the other investors also become shareholders, and you will not be able to deduct the initial years’ losses on your tax return. 5. You cannot attain your objectives by forming a sole proprietorship and borrowing the capital from the investors in the form of a loan.

Answer 1

In this case, it is better to opt for a LLLP. The key advantage of Limited liability limited partnership is that the general partners receive limited liability on the debts and obligations of the LLLP. In this case, you will be the general partner and the other shareholders will be limiting partners.

The LLLP is a flexible form of business where general partners, in this case you, will be able to manage the business operations of the LLLP, while the limited partners typically only maintain a financial interest. This is designed to offer limited liability to all partners in the partnership where partners will decide the structure of the organization and the distribution of profits and losses.

One of the biggest disadvantage in opting for LLLP is that, general partners are jointly and severally liable for the partnership’s obligations, although limited partners are protected from liability. But, undue care can be taken for such situations. Considering all the above facts, i must say, LLLP is the best option.