Introduction
For any business the organizational set up plays a pivotal role in the growth of business. Limited liability of ownership is originally associated with corporate set ups; but the same features with some modifications have also been applied in limited liability partnerships. There are other positive and negative features of both these types of organization set ups. In this write an analysis has been made about features of a corporation and a limited liability partnership with particular emphasis on limited liability feature in each of these set ups.
Limited Liability Partnership (LLP)
As the name suggests a Limited Liability Partnership (LLP) provides the partners with the privilege of limited liability. LLP has recently become a popular organizational form for certain businesses or professions. It is seen that professional like accountants, architects, lawyers, and others prefer LLP when they constitute partnerships. Different states in the United States have formulated different statutes to govern limited liability partnerships. However the basic idea of limited liability for partnerships has emerged out of Uniform Partnership Act.
Section 306(c) of the Uniform Partnership Act elaborates the obligation of a partner in the limited liability partnership. It states “An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner.” (Uniform Partnership Act 1997, sec 306(c))1 This provision of law implies that the liability of the limited liability partnership firm is distinct from that of the partner in his/ her individual capacity and a partner is not liable for such liability. In other words the partner’s liability is limited only to the contributions that he/ she has agreed upon in the partnership agreement.
LLP has emulated a body corporate so far as the liabilities of partners are concerned. Otherwise it has similar features as in general partnership. In a LLP also the partnership firm gets dissolved even on a verbal declaration about the same of any of the partners. Its existence is fragile and not perpetual as in case of a limited liability company.
Every partner of a LLP like general partnerships acts as an agent of the firm and can create liabilities for the firm by his acts on behalf of the firm. Though in an LLP a partner’s liability is limited and does not coexist with that of partnership but liability created for the firm by any of the partner can endanger the business and continuity of the firm at any time. For the purpose limiting authority of a partner to act as an agent, the partnership agreement (even of a LLP) has to specifically include a limiting clause.
Upon inclusion of an agency limiting clause the ‘LLP is not bound by anything done by a member dealing with a third party if the member does in fact have no authority and the person with whom he is dealing knows or believes that to be the case.’(Christopher Jessel, page 159) 2 However, partners will be responsible for liabilities caused by their own actions as partners even in a limited liability partnership.
Corporation
Corporation or a company is an artificial legal person. Its legal existence is separate from its members. There may be limited companies as well as unlimited companies. In case of an unlimited company the liability of each member extends to the whole amount of company’s debts and liabilities. Obviously in case of an unlimited company, the liability is similar to that of partners although the creditors cannot institute legal proceedings against the individual members.
In a limited company the liability of members may be limited either by shares or by guarantee. Companies limited by guarantee do not have share capital and their members undertake to bear liabilities of the company up to guaranteed amount. In case of limited company having share capital, the liability of members is limited to the amount that has remained unpaid on the nominal amount of shares. Unless otherwise provided in the articles there is no liability to pay any balance amount on shares except in pursuance of calls duly made in accordance with law and the articles while the company is a going concern, or of calls made in the event of winding up of the company.
Besides this limited liability feature, a corporation has certain advantages over other types of organizations. Corporation has a perpetual existence to ensure its larger life. Shares of a corporation are easily transferable without seeking permission from other members. The management, being separate from ownership, has the advantage of seeking services of professional managers. Financial institutions like banks prefer corporate entities to extend loans and advances. There may be certain limitations but the positive features of a corporation overweigh its limitations.
Recommendations and conclusion
A business is established with a vision of growth without endangering the personal assets of the owners. LLP is an inter-se agreement among the partners about the limitation of partners’ liabilities. For outsiders the liability of partners of LLP co-exists with that of firm unless the third party having business transactions with LLP remain limited only when that party has knowledge about these facts. In case of corporation limited by shares or guarantee liabilities of members are limited whether third party is having knowledge about that or not. There are other advantages of perpetuity and potential for growth that make corporation a better option than LLP when a decision is to be taken between the two.
- Uniform Partnership Act 1997, sec 306(c). Web.
- Christopher Jessel, Development Land Overage and Clawback, Jordans, 2007, page 159. Web.