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part by a statute, the Uniform Limited Partnership Act, which has also been adopted in one form or
another by 49 states.
The limited liability company (LLC) is now available to entrepreneurs in all 50 states. The LLC is a
separate legal entity owned by members who may, but need not, appoint one or more managers (who
may, but need not, be members) to operate the business. Although it was initially necessary for there
to be multiple members to form an LLC, all states now allow single-member LLCs. An LLC is formed
by filing articles with the state government and paying the prescribed fee. The members then enter
into an operating agreement setting forth their respective rights and obligations with respect to the
business. Most states that have adopted the LLC have also authorized the limited liability partnership
(LLP), which allows general partnerships to obtain limited liability for their partners by filing their
intention to do so with the state. This form of business entity is normally used by professional
associations that previously operated as general partnerships, such as law and accounting firms.
As will be discussed later, since the LLC affords its owners most of the benefits of the limited
partnership without requiring that any owner be exposed to unlimited liability, the popularity of the
limited partnership is definitely waning. It is currently used most often for certain sophisticated
investment vehicles (such as hedge funds) and in complex family estate plans.
Comparison Factors
The usefulness of the five basic business forms could be compared on a virtually unlimited number of
measures, but the most effective comparisons will likely result from employing the following eight
factors:
1. Complexity and cost of formation. What steps must be taken before your business can
exist in each of these forms?
2. Barriers to operation across state lines. What steps must be taken to expand your
business to other states? What additional cost may be involved?
3. Recognition as a legal entity. Who does the law recognize as the operative entity? Who
owns the assets of the business? Who can sue and be sued?
4. Continuity of life. Does the legal entity outlive the owner? This may be especially
important if the business wishes to attract investors, or if the goal is an eventual sale of the
business.
5. Transferability of interest. How does one go about selling or otherwise transferring one‟s
ownership of the business?
6. Control. Who makes the decisions regarding the operation, financing, and eventual
disposition of the business?
7. Liability. Who is responsible for the debts of the business? If the company cannot pay its
creditors, must the owners satisfy these debts from their personal assets?
8. Taxation. How does the choice of business form determine the income tax payable on the
profits of the business and the income of its owners?
Formation of Sole Proprietorships