Business Entities, Laws, and regulations Paper

Contemporary Business Law/421

Business Entities, Laws, and Regulations Paper
Choosing the right business entity is as critical to entrepreneurs as it is to professionals. In the United State, people have the right to chose, from a long list of options, a business entity that will meet their particular needs. Found within that long list of options are two business entities that have met the needs of many entrepreneurs as well as professional. These two business entities, known as Limited Liability Company (LLC) and Limited Liability Partnership (LLP), have forming, control, taxation, and liability components, which must be fully understood in an effort to identify their advantages as well as their disadvantages.
The Restaurant and Sports Bar
Lou and Jose are entrepreneurs that want to open an establishment that will offers its patrons a place to dine, while they watch their favorite sports teams in action. Although Lou and Jose have an abundance of drive and ambition, they lack the required capital to open the business. Miriam, a wealthy investor, is interested in providing that needed capital in return for a percent of ownership in the business. Since Lou and Jose are more than willing to take on the day-to-day issues of running a business, a limited liability company (LLC) might just proof to be the best type of business entity for the three of them.
Limited Liability Company
A limited liability company (LLC) “is an unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations” (Cheeseman, 2010, p. 267). For Lou, Juan, and Miriam the depth and scope of these favorable attribute will depend on the state statute that govern their LLC. In other words, because LLCs are “creatures of state law”, they differ from one state to another (Cheseman, 2010, p. 267).
Forming an LLC
Minimum number of persons. The minimum number of persons required to form an LLC differs between states. Some states required their LLCs to have no less that two persons; other states are satisfied with just one person (Cheeseman, 2010).
Articles of Organization. To form an LLC, a document that contains the articles of organization must be composed and “filed with the appropriate states office” (Cheseman, 2010, p. 268). This document must contain the name of the limited liability company, the mailing address of its principal office, the period of its duration, and the name and address of its manager (Cheeseman, 2010)
Control and Ownership Interest
Operating Agreement. The members of an LLC can, if the chose to so, compose an operating agreement that set and regulate the different parameters of conduct expected from the business, its members and managers (Cheeseman, 2010). Such an agreement, between the members of an LLC, would make it clear to all that the LLC will be either a member-managed LLC or a manager-managed LLC. If member managed, the members of the LLC “would have the right to manage the LLC” as they saw fit (Cheeseman, 2010, p. 271). If manager managed, the members of the LLC would “delegate their management rights” to a designated manager or managers Cheeseman, 2010, p. 271).
Ownership Interest. An LLC can, in accordance with its operating agreement, provide its members with evidence of their ownership interest. Such evidence is usually given to a member in a certificate of interest. This certificate of interest would denote the member’s total ownership interest in the LLC (Cheeseman, 2010).
Taxation
Due to the fact that the Internal Revenue Service “does not recognize an LLC as a classification for federal tax purposes,” members of an LLC must decide whether to file the entity’s tax return as a corporation, partnership, or as a sole proprietorship (Internal Revenue Service, 2010, para. 4). Failure to file form 8832, which tell the IRS the LLCs decision, will trigger a number of default rules. These default rules will automatically direct the LLC to file its federal tax return as either a partnership or as a sole proprietorship, depending on whether the LLC has one or more members (Internal Revenue Service, 2010).
Liability Issues
The liabilities of an LLC. An LLC is liable for the actions of its members, managers, and agents (Cheeseman, 2010). In other words, if a member, manager, or agent of an LLC commits a “wrongful act, while acting within the ordinary course of business of the LLC,” then LLC members can find themselves financially liable for that wrongful act (Cheeseman, 2010).
The Liabilities of an LLC Manager. Nonmember manager of an LLC cannot be held liable for the debts, obligations, or other liabilities of their employer (i.e., the LLC) (Cheeseman, 2010).
The Liabilities of an LLC Member. A member (owner) of an LLC is liable for all of debts, obligations, and other liabilities incurred by their LLC. However, that liability cannot extend beyond the member’s capital contribution (Cheeseman, 2010).
The Obstetricians
Akiva and Tara are newly licensed obstetricians that would like join forces in an effort to open a birth clinic. They know that in their line of business, a wrong move can spell financial disaster. Therefore, they would like to enter into a limited liability partnership with each other.

Limited Liability Partnership
A limited liability partnership (LLP) is “a special form of partnership in which all partners are limited partners, and there are no general partners” (Cheeseman, 2010, p. 273). For Akiva and Tara this means that they will not be held “personally liable for negligent acts conducted by other partners or employees not under their supervision” (All Business, 2010, para. 1).
Forming an LLP
Permitted Professions. Professionals interested in forming an LLP must first find out which professions, within their particular state, are permitted to form such partnerships. For instance, in the state of New York only lawyers, accountants, engineers, and architects are permitted to form LLP (Legal Zoom, 2010).
Articles of Limited Liability Partnership. Prospective partners of an LLP must, if they want to have their LLC legally recognized, compose and file a document known as ‘articles of partnership’ (Cheeseman, 2010). This document should, as a matter of common sense, clearly state “the nature of the business being formed, the capital contribution of each partner as well as their duties and responsibilities, and the share in net profits of the organization” (All Business, 2010, para. 2).
Liability Insurance. Some states require prospective LLPs to purchase a robust liability insurance policy before they can be registered (Cool lawyer, 2010). Such a requirement is the trade off that allows third parties to collect judgments levied against an LLP, while at the same time allowing the partners of that same LLP to keep their limited liability protection (Cheeseman, 2010).
Liabilities
Limited Partner. All of the partners in an LLP, no matter the size of their capital contribution, enjoy the benefits that come from being a limited partner (Cheeseman, 2010). In other words, a partner in a LLP can expect to only lose “their capital contribution if the partnership fails” (Cheeseman, 2010, p. 274).
Taxation
When it comes to taxation, LLPs fall under the same rules as other partnership entities. In other words, LLPs follow the flow-through taxation rules, which dictate that each partner must report all profits and losses in their individual tax return (Cheeseman, 2010).
Conclusion
Although entrepreneurs and professionals are not carbon copies of each other, both of those groups most certainly look forward to reaping the fruits of their labor. To that end, they must carefully choose a business entity that will provide them with the best set of choices as well as protections. For example, an LLC not only allows entrepreneurs to organize by simply composing and filing a single document, but also to choose whether to file taxes as a corporation, partnership, or as a sole proprietorship. Beyond the one step organizational process and multiple taxation choices, an LLC offers its members limited liability protection. Like wise, an LLP offers its professional members the ability to organize with ease, to be taxed as partnership, and to be protected from any financial exposure beyond their capital investment.

References
All Business (2010). What is an LLP? Retrieved from http://www.allbusiness.com/business-planning-structures/business-structures-limited/394-1.html Cheeseman, H.R. (2010). Business law: Legal environment, online commerce, business ethics, and international issues (6th ed.). [University of Phoenix Custom Edition e-text]. Upper Saddle River, NJ: Pearson Prentice Hall. Retrieved December 13, 2010, from University of Phoenix, rEsource, BUS/415– Business Law web site: https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx
Cool lawyer (2010). Limited Liability Partnership Business Info. Retrieved from http://www.coollawyer.com/webfront/bizfilings/LLP.php
Internal Revenue Service (2010). Forming a Limited Liability Company (LLC). Retrieved from http://www.irs.gov/businesses/small/article/0,,id=205011,00.html Legal Zoom (2010). Limited Liability Partnership. Retrieved from http://www.legalzoom.com/llp-guide/llp-formation-restrictions.html