Limited Liability Entities
| Author | Jeffrey Wilson |
| Pages | 155-160 |
Page 155
Since the 1990s, individuals who wish to form businesses have seen a significant increase in the types of business entities that may be formed. Laws governing these newer forms of businesses limit the liability that business owners may face. In general, a person who invests in a limited liability entity is only liable for an amount equivalent to the investment made by the investor.
Some limited liability entities resemble general partnerships, except for the limitations in liability. Other entities, especially limited liability companies, are more similar to corporations in their structure. Although some entities are taxed in a manner similar to partnerships, other forms of limited liability entities may be taxed similar to corporations.
Owners of three types of businesses are not protected by the limited liability that other business forms offer. An owner of such a business is personally liable for the debts incurred by the business. These businesses include general partnerships, joint ventures, and sole proprietorships. General partnerships are formed when two or more agree to engage in a business for profit. A joint venture is similar to a general partnership, except that two or more people form a venture for a particular business project. A sole proprietorship is a business that is carried on by an individual.
The law traditionally has not treated these types of business as independent and distinct from the owners. Owners of these types of business also do not need to follow the formalities that owners of other forms of businesses, such as corporations, must follow. Moreover, these business entities generally are not governed as heavily by state and federal regulations. Thus, although limitations on liability provide considerable incentive to form a limited liability entity, other factors may lead business owners to form an entity that does not enjoy limited liability.
The corporation is the most common form of business entity in the United States. A corporation is formed when individuals complete certain formali-
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ties, including the filing of documents known as articles of incorporation and the payment of fees to the proper authority. The secretary of state in most states is the official responsible for receiving the documents and filing fees from the corporations.
Traditionally, the corporate form of business was the preferred limited liability entity because the corporation exists separate from its owners and investors. The corporation, although an artificial entity, is treated like an individual in most respects. It may enter into contracts, it may sue or be sued, and it may own property. A corporation may also exist perpetually because it may continue to exist even when owners and investors change.
As an entity separate from its owners and investors, a corporation is liable for its own contracts. Owners and investors generally are only liable to the extent of the amount that these individuals invested in the corporation.
Many states base their laws governing corporations on the Model Business Corporation Act (MBCA), which was prepared by the Section of Business Law of the American Bar Association. However, most of these states have deviated from the MBCA with respect to some of the provisions. Other states have chosen not to follow the MBCA and have instead drafted their own statutes.
Parties form a limited partnership in a manner similar to a general partnership. The most significant difference between these two types of businesses is that some of the owners of the limited partnership, known as limited partners, do not participate in the management and control of the partnership's business. Instead, limited partners provide capital contributions to the partnership and are liable only to the extent of those capital contributions.
Like a general partnership, owners of a limited partnership enter into a partnership agreement. A limited partnership must file a certificate with an appropriate state authority, usually the secretary of state. The certificate provides the limited partnership's name and character of business, along with the names and addresses of the general and limited partners. A limited partnership's name must include "L.P.," "Ltd," or "Limited Partnership" to identify the form of the business entity. The purpose for this requirement is to warn those who deal with the partnership that some of the partners are not personally liable for the partnership's debts.
Nearly every state adopted the Uniform Limited Partnership Act, which was approved in 1916 and again in 1976 by the National Conference of Commissioners on Uniform State Laws (NCCUSL). The NCCUSL significantly revised this uniform law in 2001, though as of 2005 only a small number of states had adopted the revised version.
The limited liability partnership (LLP) emerged as a business form during the 1990s. This type of business entity is similar to a general partnership in that each partner may...
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