Discussion
If Peter and Andrew form a limited liability corporation, they would form a business that is legally separate from them. The limited liability part would ensure their personal assets could not be named in a future lawsuit against the company or used as collection for debts in the event of a bankruptcy, which is not true of a partnership (Kaufman, 2012). In addition, Molk (2018) explains that favorable tax and limited liability considerations explain much of LLCs’ success. Yet more important for many firms are LLC statutes’ commitment to contractual freedom. Contractual freedom allows sophisticated LLC parties to craft governance provisions that are individually tailored to meet those parties’ specific needs, which in turn lowers the cost of doing business and promises to maximize economic efficiency (p. 2).
There are also tax benefits to both partnerships and LLCs. There are a few instances in which LLC owners could still have some personal liability, however, such as “if there is no clear separation between the business and the individuals…if a member engages in fraud or illegal activities…if one or more members has mismanaged the affairs of the LLC” (Murray, 2018, para. 8). This is where Peter and Andrew’s potential conflict with Paul becomes important.
Peter and Andrew should not be making decisions without Paul if Paul is going to be managing their front-line operations and interacting with all of their customers on a daily basis. If Paul is not happy with his end of the partnership and he has first-hand access to all the customers, how is that going to benefit Peter and Andrew’s company in any way? In fact, the Bible warns, “Do not be unequally yoked…for what partnership has righteousness with lawlessness? Or what fellowship has light with darkness?” (2nd Corinthians 6:14, ESV).
With an LLC, Peter and Andrew can form it and invite Paul to join, taking care to ensure the operating agreement is written correctly to give them voting power or specific rights in the management of the company. There are always risks with any partnership but including Paul as a partner when they already know he fundamentally disagrees with some element of their business strategy is a major concern.
In a manager-managed LLC, a manager makes most of the day-to-day decisions regarding management of the organization, but members generally retain the right to vote on certain matters…in a member-managed LLC, members make decisions for the organization…the members may adopt an operating agreement which allows for alternative voting arrangements or even for multiple classes of membership with different voting and distribution rights…LLCs are often viewed as having the best of both worlds (Johnson, 2015, p. 164).
If Paul refuses the chance to become a member of the LLC, Peter and Andrew can always ask to hire him as a manager or even as a consultant for their business.
Another reason to develop an LLC is to prevent the possible closure of the business or legal disputes if the partnership goes south. This is definitely not unheard of, especially in the area of partnerships between friends or family members. Proverbs 6:1-5 warns about the danger of partnerships and possible liability: “my son, if you have put up security for your neighbor, have given your pledge for a stranger, if you are snared in the words of your mouth, caught in the words of your mouth, then do this, my son, and save yourself, for you have come into the hand of your neighbor: go, hasten, and plead urgently with your neighbor. Give your eyes no sleep and your eyelids no slumber; save yourself” (ESV). “If and when an LLC’s owners decide its assets would be more productively deployed elsewhere…they may simply close the doors and take the assets with them,” explains Reiser (2018). “No law prevents LLC owners from pursuing this option down the line” (p. 31). Because an LLC is a pass-through entity in regard to tax laws, profits are allocated based on the decisions in the operating agreement. Most LLCs allocate profits and losses to members “based on their ownership percentage or based on a special percentage allocation as agreed upon by the members” (Masters, 2018, para. 3).
References
Johnson, L. R. (2015). FROM GP TO LLC: Making the right choice of entity decision. Journal for the International Academy of Case Studies, 21(6), 159-167. Retrieved from https://search-proquest-com.ezproxy.liberty.edu/docview/1768852032?pq-origsite=summon&accountid=12085
Kaufman, N. (2012). What Is the Difference Between an LLC and a Partnership? Retrieved from Entrepreneur: https://www.entrepreneur.com/answer/224786
Masters, T. (2018). LLC and Profit Distribution. Retrieved from Chron: https://smallbusiness.chron.com/llc-profit-distribution-54720.html
Molk, P. (2018). Protecting LLC owners while preserving LLC flexibility. UC Davis Law Review, 51(5), 1-39. Retrieved from https://advance-lexiscom.ezproxy.liberty.edu/document/teaserdocument/?pdmfid=1516831&crid=1c2ed447-ad8b-4bd1-9aa8-5c9392577ddd&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A5SV9-4GW0-00CW-C02N-00000-00&pddocid=urn%3AcontentItem%3A5SV9-4GW0-00CW-C02N-00000-00&pdcontentcomponentid=12494&pdteaserkey=h1&pditab=allpods&ecomp=5ynk&earg=sr0&prid=1dbc78f3-bf60-42af-abfe-ca3d822ba0a0
Murray, J. (2018). Which Should I Form – an LLC or a Partnership? Retrieved from The Balance Small Business: https://www.thebalancesmb.com/which-should-i-form-an-llc-or-a-partnership-398646
Reiser, D. B. (2018). The rise of philanthropy LLCs. Stanford Social Innovation Review, 16(3), 26-33. Retrieved from https://search-proquest-com.ezproxy.liberty.edu/docview/2043240227?pq-origsite=summon&accountid=12085
Response
It is true that if Andrew and Peter form limited liability Corporation, then their personal assets would be safe from future lawsuit used for the collection of debts in case of bankruptcy. Limited liability specifically means that there is a wall between your assets and the company assets. The LLC and corporation are said to have limited liability which is not true in its meaning. LLC and the corporation have unlimited liability in terms of its own assets. It can everything it owns, however not the personal assets of its owners. Limited liability refers to the fact that the business creditors can only reach out to the business assets and the personal creditors can only reach out to the personal assets (Morse, 2002). While without limited liability, business and personal creditors both can reach out to both business and personal assets. It would be legally separate from their personal assets. Other than this, the limited liability of the corporation and the favorable tax offers the reasons for its much success and popularity. Tax benefits are also enjoyed by partnerships. However, in the case of the use of the business assets for personal purposes or the engagement in illegal and fraudulent activities can lead to a grey area (Maizes, 2012).
Therefore, Paul should be involved in the decision-making process as well to ensure that no disagreement arises even when they already know disagreement with Paul can be a concern in business. Furthermore, there is a possibility that in case of disagreement with Paul, he can be offered the chance to become manager or consultant of the firm. Moreover, the reason for going for LLC is to make sure that fewer disputes arise on closure of the business. Whatever the case, the agreement among partners should be given priority. As reference to the bible, “Do not be unequally yoked with unbelievers. For what partnership has righteousness with lawlessness? Or what fellowship has light with darkness?” (2 Corinthians 6:14-18) (Openbible.com, 2018).
References
Maizes, R. (2012). Limited Liability Companies: A Critique. St. John’s Law Review, 70 (3), 575-608.
Morse, G. (2002). Partnerships For The 21 St Century? – Limited Liability Partnerships And Partnership Law Reform In The United Kingdom. Singapore Journal of Legal Studies, 455-488.
Openbible.com. (2018). Business Partnerships. Retrieved October 9, 2018, from Openbible.com: https://www.openbible.info/topics/business_partnerships
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