Ownership Rights in Limited Liability
A limited liability partnership (LLP), also known as a limited liability company (LLC), is midway between a partnership and a corporation on the business life cycle, and combines the limited liability advantage of a corporation with the tax and ownership advantages of a partnership.
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Corporate Life Cycle
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The corporate life cycle describes the various stages most businesses typically pass through on the way to becoming a corporation. The first stage is individual ownership, known as a proprietorship, followed by a partnership, in which two or more individuals conduct a business together. A limited liability partnership is the next step before incorporation.
Limited Liability
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Limited liability means that the most an investor can lose in the event of business failure is the original investment amount. Like a corporation, owners are not held personally liable and creditors can not lay claim to the owner's personal assets. In a proprietorship or partnership, owners are held liable for the failure of the business and their personal assets can be seized to pay creditors.
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Advantages
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The earnings of a limited liability partnership are only taxed once, whereas in a corporation, earnings are subject to double taxation. A corporation's earnings are taxed at the corporate level and again at the individual level when earnings are distributed to investors. The other advantage of forming a limited liability partnership is that decisions are easily and swiftly made, as only a small number of individuals are involved in the decision-making process.
Disadvantages
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The primary disadvantage of a limited liability company is that the life of the company is limited as well. If one of the partners dies or exits the partnership, that particular partnership no longer exists, and a new agreement must be executed. Another disadvantage is that while the risk to the owners is reduced, the customers, lenders and suppliers face increased risks if the business fails.
Example
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If an individual invests $10,000 dollars in a partnership that goes bankrupt owing $2 million, and the other partners can not pay their share, then the individual could be held responsible for the entire $2 million.
However, if the same individual were to invest $10,000 in a limited liability partnership that goes bankrupt owing $2 million, the individual would only face a loss of the original $10,000 investment, regardless of the other partners' ability to pay.
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