For this discussion, consider three friends who had an idea for a new kind of sh

Question

For this discussion, consider three friends who had an idea for a new kind of shoe. They created a sample in their garage, and then found a manufacturer to make a limited number of the new shoes. They took their new shoes to the flea market to sell. They sold very well and the three people wanted to expand their business. The following options were discussed in the group: <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Option 1: Become a limited partnership.
Option 2: Become a corporation.

For this discussion, choose one of the two options above and discuss why your choice is the best choice for this new business.

Response Criteria:
Respond to the question and to other students' postings. Consider the following when posting your responses:

Explanation / Answer

Owners of an LLC are referred to as members rather than owners or partners. They also have limited liability (hence the name) which means they are not at risk for losing as much as an owner would in a partnership or individually owned operation.
An LLC has no limit to the number of members it has. It is acceptable for LLCs to only have one member making it similar to a sole proprietorship. Corporations are run by a group of stockholders who also have limited liability. The stockholders invest capital into the company. The only thing that a stockholder loses in the event that the corporation folds, is the capital invested. The corporation is considered to be a completely separate from the individual(s) who started the company.

One of the largest advantages of choosing an LLC over a corporation is the tax option. An LLC can choose to be taxed as a sole proprietorship, partnership or corporation. If the LLC chooses be taxed as a non-corporation, then there is less administrative paperwork needed, no double taxation, and less record keeping. LLCs are also considered to be separate entities from members. This means that members are usually not liable for acts and debts of the LLC. Corporations are treated like individuals. They have rights and responsibilities that they can exercise.

One of the downsides of the LLC is gaining capital. Creditors more often than not, require a member to personally assure that the debt the LLC acquires to operate will be paid back timely and in full. This means that the member becomes liable for the debts. If the LLC is doing business outside of the United States, then the business will be taxed as a corporation regardless of it's US tax status. Corporations have some down sides. Most affect the shareholders. Should a corporation fold, the shareholder is the last to receive anything from the investment. If there are debts to be paid, those are paid first. After all financial obligations are taken care of, if there is anything left over, then the shareholders may get some of their investment back. Another downside, is the double taxation. Not only is a corporation taxed but the shareholders are taxed as well.

Simply stated, corporations have stock options. LLCs don't. There are pros and cons to this as well. To some, stock options are a great benefit. It offers the employee or party an option to have a stake in the company without all of the strings attached. Should a corporation close, the stockholders do not face the loss that shareholders face. Stocks are paid out if there is any value. The value is paid to the stockholders first and the shareholders last. For employees of an LLC, something similar to a stock option is the chance to become a member. This change to a member may give the employee more say in the company management but also the employee now has a higher stake in the actions that the LLC makes.

Determining whether a business should be a corporation or LLC requires time and research. The owner(s) need to evaluate all the circumstances that the business can face. If oversees business is part of the business plan, research of foreign laws and regulations need to be closely reviewed as well. This is a decision that cannot be made in haste and could weigh a lot on the pocketbooks of all involved.

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