Limited Liability Entities
All paralegals should be aware of an additional form of business organization — the limited liability entity. These business organizations are very similar to other forms of business organizations. Limited liability entities are popular because they offer tax advantages and protection from personal liability not offered by the other forms of business organization. Most states now recognize limited liability partnerships and limited liability companies as alternative forms of business organization.
Limited Liability Partnerships
The major advantage of a traditional partnership is the ability to pass through income from the business to the partners so that it is taxed at the lower individual tax rate. This advantage is offset by the nearly unlimited
A limited liability partnership is intended mainly for professionals,
who ordinarily do business in partnership arrangements. The limited liability form of partnership allows even the general partners to restrict their responsibility for the acts of the partnership to the amount of their capital investment. In effect, a limited liability partnership allows the partners to take advantage of the taxation allowed by a partnership, but avoids extensive personal liability.
Limited Liability Companies
The limited liability company addresses the primary disadvantage of the corporate form of business organization — taxes. In the corporate form of business organization, the profit of the business is taxed at a corporate rate that is usually higher than the individual tax rate. Once the profits are distributed to the stockholders, they are taxed again, this time at the individual tax rate. This double taxation is the price of limited liability.
The limited liability corporation form of business organization allows the business to “pass through” profits to the business investors, who are called members. The members retain the limited liability aspect of the corporate form of business organization, but avoid double taxation.
