Page 120 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 8: Setting up a Small Business Enterprise

8.2.3 Selecting a Business Entity: Limited Liability Company (LLC) Notes

The limited liability company is a hybrid type of business structure. It contains elements of both
a traditional partnership and a corporation. The limited liability company form of business
structure is relatively new. Only in the last few years has it become available as a form of
business in all 50 states and Washington D.C. Its uniqueness is that it offers the limited personal
liability of a corporation and the tax benefits of a partnership. A limited liability company
consists of one or more members/owners who actively manage the business of the limited
liability company. There may also be non-member managers employed to handle the business.

Advantages

The members/owners in such a business enjoy a limited liability, similar to that of a shareholder
in a corporation. In general, their risk is limited to the amount of their investment in the limited
liability company. Since none of the members will have personal liability and may not necessarily
be required to personally perform any tasks of management, it is easier to attract investors to
the limited liability company form of business than to a traditional partnership. The members
will share in the potential profits and in the tax deductions of the limited liability company, but
in fewer of the financial risks involved. Since the limited liability company is generally taxed as
a partnership, the profits and losses of the company pass directly to each member and are taxed
only at the individual level.
A further advantage of this type of business structure is that it offers a relatively flexible management
structure. A final advantage is that limited liability companies are allowed more flexibility than
corporations in how profits and losses are actually allocated to the members/owners.

Disadvantages

In as much as the business form is still similar to a partnership in operation, there is still a
potential for conflict among the members/owners of a limited liability company. Limited
liability companies are formed according to individual state law, generally by filing formal
Articles of Organization of a Limited Liability Company with the proper state authorities in the
state of formation. Limited liability companies are, generally, a more complex form of business
operation than either the sole proprietorship or the standard partnership. They are subject to
more paperwork requirements than a simple partnership but somewhat less than a corporation.
Limited liability companies are to far more state regulations regarding both their formation
and their operation than either a sole proprietorship or a partnership.
Similar to traditional partnerships, the limited liability company has an inherent lack of continuity.

8.2.4 Selecting a Business Entity: Corporations

A corporation is a creation of law. It is governed by the laws of the state where it was incorporated
and of the state or states in which it does business. In recent years it has become the business
structure of choice for many small businesses. Corporations are generally, a more complex
form of business operation than either a sole proprietorship or partnership. Corporations are
also subject to far more state regulations regarding both their formation and operation. The
following discussion is provided in order to allow the potential business owner an understanding
of this type of business operation.

The corporation is an artificial entity. It is created by filing Articles of Incorporation with the
proper state authorities. This gives the corporation its legal existence and the right to carry on
business. The Articles of Incorporation act as a public record of certain formalities of corporate
existence. Adoption of corporate bylaws, or internal rules of operation, is often the first business

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