Corporations

[This is the fourth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company’s owners are not liable for the LLC’s obligations.
Part 6. Options for an LLC’s management structure.
Part 7. Options for an LLC’s tax treatment.]

To set the background for a discussion of the basics of limited liability companies, we’ve discussed sole proprietorships, partnerships, and corporations. As we’ll see, a limited liability company shares some characteristics with corporations and other characteristics with sole proprietorships (if the LLC has one owner, called a member) or partnerships (if the LLC has more than one member).

The first thing to recognize about a limited liability company is that it is a separate legal entity, apart from its owners. How does that compare to the other structures? First, a sole proprietorship is NOT a separate legal entity apart from its owner. If you’re running a business as a sole proprietorship, you really ARE the business, and the business is you.

At the other end of the spectrum, a corporation is a distinct legal entity, completely separate from its shareholders. For example a corporation can sue and be sued in its own name, It can enter into contracts in its own name. And it can go into bankruptcy without dragging its owners with it.

In the middle of the spectrum is a partnership. Without getting into all the details, I’ll just say that for some purposes a partnership has the characteristics of a separate legal entity, and for other purposes a partnership is treated more like the aggregate of all the partners.

So in this sense, a limited liability company is just like a corporation. It is a separate legal entity, apart from its members. It can sue and be sued; it can enter into contracts; and it can go into bankruptcy, all apart from its members. And all that is true even if the LLC has only a single member.

Next we’ll discuss another way that a limited liability company is like a corporation — the liability shield.
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[This is the third post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.

Let’s get back to our trek toward a discussion of the basics of limited liability companies. The first two types of business structures we’ve looked at — sole proprietorships and partnerships — have two significant features in common. First, the owner or owners are liable for the obligations of the business. Second, the business itself does not pay taxes. Instead, the income and other tax items are “passed through” to the owner or owners, who pay tax on the income. Things change with corporations, the third type of business structure.

Although corporations are not as old as sole proprietorships or partnerships, business organizations with at least some of the characteristics of corporations have been around for centuries. For example, the oldest corporation in North America, Hudson’s Bay Company, was incorporated in 1670.

Perhaps the most important feature of a corporation is that the owners of the corporation — called stockholders or shareholders — are NOT liable for the obligations of the business. And that’s very good news for people who owned stock in Lehman Brothers, which melted down into the largest bankruptcy in American history. Or, going back a little further to previous record holders, people who owned stock in Enron and Worldcom. Even though the people who owned stock in those corporations may have lost everything they invested, they were not liable to the corporations’ creditors, and they did not get pulled into the corporate bankruptcies. That protection against shareholders being held liable for the corporation’s obligations is sometimes called a liability shield or a corporate veil, and it doesn’t exist for sole proprietorships or general partnerships.
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Articles Posted in Corporations

Just what IS a limited liability company? Part 4. It’s a separate legal entity.

Just what IS a limited liability company? Part 3. It’s not a corporation.