A new breed of company.

• Author: Calderon, Jeanne
• Position: Limited-liability companies and partnerships

You see those puzzling initials everywhere: LLC and LLP. But do limited-liability companies and partnerships make dealing with your vendors and service suppliers a whole different ballgame?

One Monday morning, you get an alarming phone call. Your accounting firm has made a serious error, and the consequences could cost your company a bundle. You take a deep breath. Okay, we can get back most of that by suing the firm and, if necessary, the partners, you think. Then you remember: The firm is a limited-liability partnership, so you might not be able to go after all the partners. You may be limited to the amount for which the partnership is insured - not nearly enough to cover your costs. Uh oh.

While this isn't a likely picture for most companies, you should be aware that the limited-liability company and limited-liability partnership structures may become a bigger factor for your company during the next few years. That's because recent legislation has made it easier to form these entities. And although these structures probably aren't suitable for your corporation (especially if it's a large public company), many of the companies and firms you deal with will be selecting these new organizational structures, so you should have a general understanding of how they work and how they'll impact your company.

For many closely held companies, the LLC and LLP are attractive organizational alternatives to S corporations, general and limited partnerships and professional corporations. Currently, 47 states and the District of Columbia permit the formation of LLCs, and the remaining states (Hawaii, Massachusetts and Vermont) are considering adopting laws that would authorize LLCs. LLPs are permitted in fewer than 20 states, in part because some states extend the LLC definition to include what essentially are LLPs.

The LLC combines the best features of a partnership and an S corporation: the partnership's pass-through tax benefits and flexibility with the corporation's limited liability of management and owners. Yet an LLC has certain tax advantages that a limited partnership or an S corporation doesn't. For example, to qualify for favorable tax treatment, an S corporation can't have other corporations, partnerships or nonresident aliens as shareholders, and it can't own 80 percent or more of another corporation. Also, it's not allowed to have more than 35 shareholders and may have only one class of stock. None of these restrictions apply to an LLC.

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