Hybrid Forms of Organization
by MaestriAlthough the three basic types of organization—proprietorships, partnerships, and corporations—dominate the business scene, several hybrid forms are gaining popularity. For example, there are some specialized types of partnerships that have somewhat different characteristics than the “plain vanilla” kind. First, it is possible to limit the liabilities of some of the partners by establishing a limited partnership, wherein certain partners are designated general partners and others limited partners. In a limited partnership, the limited partners are liable only for the amount of their investment in the partnership, while the general partners have unlimited liability. However, the limited partners typically have no control, which rests solely with the general partners, and their returns are likewise limited. Limited partnerships are common in real estate, oil, and equipment leasing ventures. However, they are not widely used in general business situations because no one partner is usually willing to be the general partner and thus accept the majority of the business’s risk, while the would-be limited partners are unwilling to give up all control.
The limited liability partnership (LLP), sometimes called a limited liability company (LLC), is a relatively new type of partnership that is now permitted in many states. In both regular and limited partnerships, at least one partner is liable for the debts of the partnership. However, in an LLP, all partners enjoy limited liability with regard to the business’s liabilities, so in that regard they are similar to shareholders in a corporation. In effect, the LLP combines the limited liability advantage of a corporation with the tax advantages of a partnership. Of course, those who do business with an LLP as opposed to a regular partnership are aware of the situation, which increases the risk faced by lenders, customers, and others who deal with the LLP.
There are also several different types of corporations. One that is common among professionals such as doctors, lawyers, and accountants is the professiona corporation (PC), or in some states, the professional association (PA). All 50 states have statutes that prescribe the requirements for such corporations, which provide most of the bene?ts of incorporation but do not relieve the participants of professional (malpractice) liability. Indeed, the primary motivation behind the professional corporation was to provide a way for groups of professionals to incorporate and thus avoid certain types of unlimited liability, yet still be held responsible for professional liability. Finally, note that if certain requirements are met, particularly with regard to size and number of stockholders, one (or more) individuals can establish a corporation but elect to be taxed as if the business were a proprietorship or partnership. Such ?rms, which differ not in organizational form but only in how their owners are taxed, are called S corporations. Although S corporations are similar in many ways to limited liability partnerships, LLPs frequently offer more ?exibility and bene?ts to their owners, and this is causing many S corporation businesses to convert to the LLP organizational form.
What are the key differences between sole proprietorships, partnerships, and corporations?
Explain why the value of any business other than a very small one will probably be maximized if it is organized as a corporation.
Identify the hybrid forms of organization discussed in the text, and explain the differences among them.
Taken From : Five-Minute MBA – Corporate Finance
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