BUSINESS LAW QUESTION! Shawn and Jasmine want to start a partnership to sell han
ID: 384382 • Letter: B
Question
BUSINESS LAW QUESTION!
Shawn and Jasmine want to start a partnership to sell hand woven sweaters. Jasmine's parents would like to invest, but they do not wish to be subject to liability for losses in excess of their capital contribution. Jasmine's mother tells Shawn and Jasmine that if she invests, she expects to have a significant say in the management of the business. Should Shawn, Jasmine, and Jasmine's parents enter into a limited partnership with the parents being limited partners, and why or why not? Would a limited liability company be a good option, and why or why not?
Explanation / Answer
Shawn and Jasmine have three options to structure the business - 1) Partnership firm, 2) Limited Partnership (LP) and 3) a limited iability company (LLC)
Jasmine's parents also want to invest, while having controlling stake in the business operations and in addition they wish to limit their liability as well. Therefore, partnership is not the right option for them. They can either form Limited Partnership or LLC. Ideally LLC is the best form of structure, for member to limit their liability to their share in the business and not incur a personal liability. However, LLC is a separate business entity, and is taxed separately than the members. Therefore, there is double taxation, one at the company level and the second at the individual level. There are also more regulatory complexities involved in forming and maintaning an LLC.
The other option is LP. There are two types of partners in a limited partnership -1) General partners and 2) Limited partners. General partners have active control in the management of the business and therefore they have a personal unlimited liability. Limited partners do not have control in the management and their liability is limited to their individual share of capital in the business and they do not have a personal liability. However, Jasmine's parents mother wants a significant say in the management of the business.
Considering all the asepcts, the best course for them is form an LP with all the members being limited partners, thus limiting their personal liability. The LP will have an LLC as a member. The LLC provides them the corporation like protection. And they get the benefit of flexibility like a partnership firm. One or more of the members can manage the LLC. These participants engaged in the management of LLC business are personally responsibly for liabilities of the LLC. Therefore, they get all the benefits such as flexibility of partnership and corporate like protection against personal liability.
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