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associated with this arrangement are generally not available in the corporate form. Should the limited
partnership‟s business fail, limited partners will be expected, despite limited liability, to honor their
commitments to make future contributions to capital.
In addition, it is fundamental to the status of limited partners that they have acquired limited
liability in exchange for forgoing virtually all management authority over the business. The corollary
to that rule is that limited partners who excessively involve themselves in management may forfeit
limited liability and be treated, for the purposes of creditors, as general partners, with unlimited
personal liability. Mitigating this somewhat harsh rule, revisions to the Uniform Limited Partnership
Act have increased the categories of activities in which a limited partner may participate without
crossing the line. Furthermore, and perhaps more fundamentally, in states that have adopted these
revisions, the transgressing limited partner is now personally liable only to those creditors who were
aware of the limited partner‟s activities and detrimentally relied on his or her apparent status as a
general partner.
Limited Liability Companies
One of the major benefits of employing the LLC form of business entity is that it shields all members
and managers from personal liability for the debts of the business. However, even though the LLC is
relatively new on the legal scene, it is expected that most of the same doctrines that can result in
piercing the corporate veil may be applied to the veil of the LLC as well. Furthermore, it can be
expected that the managers of an LLC will be held to the same fiduciary standards as corporate
directors and general partners of limited partnerships, resulting in their potential personal liability to
the members.
Taxation
It is remarkable how many significant business decisions are made without first taking into account
the tax consequences of the various options. Tax consequences should almost never be allowed to
force entrepreneurs to take actions they otherwise would not have considered. But often tax
considerations lead one to do what one wants in a different manner and to reap substantial savings as a
consequence. Such is often the case in the organization of a business. The following discussion is
confined to the federal income tax, the tax with the largest and most direct effect on organizational
issues. Each entrepreneur would be well advised to consult a tax adviser regarding this tax as well as
state income, estate, payroll, and other taxes to find out how they might impact a specific business.
Sole Proprietorships
Not surprisingly, given the factors already discussed, a sole proprietorship is not a separate taxable
entity for federal income tax purposes. The taxable income and deductible expenses of the business
are set forth on Schedule C of the entrepreneur‟s Form 1040, and the net profit (or loss) is carried back