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Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
1.^ Definition^ A business associationA partnership havingof two or more personsone or more generalto conduct a businesspartners and one orunless formed under anymore limited partners.other statute.
A corporation organizedAn unincorporatedA corporation organizedunder state law. Mustentity organized as anunder state law.elect subchapter S statusLLC under state law.by filing election withIRS (Form 2553).
2.^ Name^ No name restrictions.^ Must contain limitedpartnership withoutabbreviation. Cannotinclude a limitedpartner’s name unlessthat partner is also ageneral partner.
Must contain limitedMust containMust containliability company,corporation,corporation,L.L.C., L.C., LLC, LC,incorporated, company,incorporated, company,limited company, ltd.limited, corp., co., inc.limited, corp., co., inc.liability company, ltd.or ltd. Professionalor ltd. Professionalcompany, limited co. orcorporations must statecorporations must stateltd. co.PC or professionalPC or professionalcorporation.corporation.
3.^ Governing^ a. Certificate of co-a. Certificate of limitedInstrumentspartnership filed withpartnership filedcounty (usuallywith state.renewable every 5b. Partnershipyears).agreement.b. Partnershipagreement. Nowriting necessary toform partnership.
a.^ Articles ofa. Articles ofa. Articles oforganization filedincorporation filedincorporation filedwith state.with state.with state.b. Operating agreementb. Bylaws.b. Bylaws.(not required).c. Various contracts arec. Various contracts areallowed amongallowed among share-shareholders such asholders such as stockstock purchasepurchase agreementsagreements andand voting trusts.voting trusts.
4.^ Owners^ Partners.^ General partners andlimited partners.
Members.^ Shareholders.^ Shareholders.
5.^ Management^ Partners.^ General partners only.Authority
Managers or membersDirectors and officers.^ Directors and officers.(must choose one).
6.^ Permitted^ All partners.^ General partners only.Participation inParticipation by limitedManagementpartners may subjectthem to liability.
Managers or membersShareholders electShareholders elect(if member-manageddirectors who makedirectors who makecompany).corporate decisions andcorporate decisions andwho elect officers towho elect officers toperform and carry outperform and carry outdirectives.directives.
Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
7.^ Voting^ Majority vote of generalMajority vote ofpartners if in ordinarygeneral partners,course of business;provided, however, thatotherwise unanimouslimited partners alsovote.vote on admission ofpartners, dissolution,continuation after thewithdrawal of a generalpartner, and thecompromise of apartner’s debt to thepartnership. This can bemodified by agreement.
One member, one vote.Shareholders vote basedShareholders vote basedMajority vote ofon number of shareson number of sharesmembers, exceptowned. Majority vote ofowned. Majority vote ofunanimous vote requiredshares of those entitledshares of those entitledby statute for someto vote controls. Thereto vote controls. Theremajor decisions. Thismay be a nonvotingmay be multiple classescan be modified byclass of shares, butof shares. Votingagreement and is oftenotherwise only one classrequirements may bemodified to providepermitted.modified by agreement.voting based onownership interest. TheLLCA now references amajority in interest ofthe members. Themethod of computingvoting rights should beaddressed in theoperating agreement.
Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
- Fiduciary Duties of^ Partners have fiduciaryGeneral partners have aManagementduties and the obligationfiduciary duty of careto act in good faith andand loyalty with thewith fair dealing.obligation to act ingood faith and fairdealing.
Unless a company isOfficers and directorsOfficers and directorsmember managed,have statutory duties ofhave statutory duties ofmembers have nogood faith to act in thegood faith to act in thefiduciary duties.best interest of thebest interest of theManagers, and memberscorporation and not tocorporation and not toin a member-managedusurp corporateusurp corporatecompany, do have aopportunities. Ifopportunities. Iffiduciary duty of careminority shareholdersminority shareholdersand loyalty and theare oppressed by theare oppressed by theobligation to act in goodmajority shareholders,majority shareholders,faith and with fairthe majoritythe majoritydealing.shareholders may beshareholders may beliable.liable.
- Who Can Be An^ No restrictions.^ No restrictions.Owner
No restrictions.^ Numerous restrictions,No restrictions.including disallowingownership by non-resident aliens,partnerships,corporations, and otherspecific persons andentities.
- Number of Owners^ Need at least twoNeed at least onepartners.general partner and onelimited partner.
No restrictions.^ At least one, but noNo restrictions.more than 100,shareholders.
- Allocations of^ Partners can agree onPartners can agree onDistributionsany financialany financialarrangements subject toarrangement as long aseconomic reality.it has economic reality.Default rule is thatpartners will share inproportion to the valueof their contributions.
Members can agree onBecause only one classShareholders canany financialof stock is allowed,establish differentarrangement as long asshareholder’s share ofclasses of stock that canit has economic reality.distributions must beprovide for different orbased on proportionatepreferential returns.stock ownership.Default rule is thatdistributions are basedon proportionate stockownership.
Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
- Transfers of^ Transferable, but theTransferable, but theOwnership Intereststransferee will not betransferee will not beadmitted as a partneradmitted as a partnerwithout the consent ofexcept as provided inthe other partners.the partnershipWithout such consent,agreement or, if notthe transferee obtains anprovided, with theinterest in the profitsconsent of the otherand losses only. Ownerspartners. Without suchcan agree onconsent, the transfereerestrictions.obtains an interest inthe profits and lossesonly. Owners can agreeon restrictions.
Membership interestsStock is freelyStock is freelyare transferable, but thetransferable unlesstransferable unlesstransferee will not berestricted by the articles,restricted by the articles,admitted as a memberbylaws, or abylaws, or aexcept as provided inshareholders’ agreementshareholders’the operating agreementor by the restrictionsagreement.or, if not provided,imposed underwithout the consent ofsubchapter S.all the other members.Owners can agree onrestrictions.
- Entity Taxation^ No tax at entity level.^ Unless elected to beUnder IRCtreated as a corporationunder check-the-boxrules, will be taxed as apartnership with pass-through taxation to theowners.
Unless elected to bePass-through taxation toTaxed as a corporationtreated as a corporationowners unless built-inat the corporate level.under check-the-boxgain, excess passiverules, will be taxed as aincome, or LIFOpartnership with pass-recapture exceptionsthrough taxation to theapply. Generally notowners.taxed at corporate level.
- Taxation of Owner^ Partners are generallyRules applicable tonot taxed on thegeneral partnershipson Contribution ofProperty forcontribution of property,will apply unless it hasOwnership Interestbut if property iselected to be treated asencumbered, will bea corporation.taxed if liabilitiesexceed partner’s basis inthe property.
Rules applicable toContributions ofContributions ofgeneral partnerships willproperty for stock willproperty for stock willapply unless it hasbe taxable unless itbe taxable unless itelected to be treated as ameets the requirementsmeets the requirementscorporation.of IRC 351.of IRC 351.
- Taxation of Owner^ Partners are taxed on theRules applicable toon Contribution ofreceipt of the interest,general partnershipsServices forbut will generally notwill apply unless it hasOwnership Interestrecognize income ifelected to be treated asthey only receive aa corporation.share of the futureprofits.
Rules applicable to^ Contributions ofContributions ofgeneral partnerships willservices for stock willservices for stock willapply unless it hasbe taxable.be taxable.elected to be treated as acorporation.
Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
- How Gains and^ Partners include sharesIf the limitedLosses of Entity areof income, loss,partnership is treated asRecognized bydeduction, and credit ofa partnership, theOwnersthe entity for the yearpartnership rules willearned.apply. If treated as acorporation, losses notrecognized and gainmay be recognized ondistributions.
If the LLC is treated as aSeparately stated passNo pass through.partnership, thethrough to shareholders.Distributions generallypartnership rules willtaxable as dividends toapply. If treated as aextent of earnings andcorporation, losses notprofits.recognized and gainmay be recognized ondistributions.
- Tax Effect of Entity^ Partners can includeLimited partners cannotLiabilitiesboth recourse andinclude recoursenonrecourse liabilities inobligations in basisbasis.unless they bear theeconomic risk of loss,but may include a shareof nonrecourse liability.
Generally cannotGenerally similar toNo effect on owners’include in basis becauseLLC.basis.liabilities of LLC arenonrecourse to themembers.
- Cash Distributions to^ Distribution will be tax-Subject to rules ofOwnersfree to extent of basis,partnership orwith any excess beingcorporation, dependingtreated as a capital gain.on how elected to betaxed.
Subject to rules ofTreated as return ofWill be treated aspartnership orbasis and not taxable todividends to extent ofcorporation, dependingextent of basis. Anyearnings and profits,on how elected to beexcess will be taxed aswhich, through 2012,taxed.capital gain.will be taxed as capitalgain.
- Appreciated^ Generally, no gain orSubject to rules ofPropertyloss to partner orpartnership orDistributions topartnership on thecorporation, dependingOwnersdistribution ofon how elected to beappreciated property.taxed.
Subject to rules ofGain on appreciatedGain on appreciatedpartnership orproperty will beproperty will becorporation, dependingrecognized and passedrecognized andon how elected to bethrough to shareholdersshareholders willtaxed.and shareholders willrecognize income orrecognize income orcapital gain as acapital gain as a dis-distribution.tribution. No doubletaxation at both cor-porate and shareholderlevels.
Characteristic^ General Partnership^ Limited Partnership
Limited LiabilityS Corporation^ C CorporationCompany (LLC)
- Limitations on^ No statutory limitation,No distribution toDistributionsbut because partners arepartners if, after givingpersonally liable foreffect to it, thepartnership debt, aliabilities of thepartner would have topartnership, other thancontribute to partnershipliabilities to thethe amount necessary topartners, exceed the fairsatisfy partnershipvalue of theliabilities, thus, inpartnership’s assetsessence, returningdistributions that mayhave been made beforetaking into account thepartnership liabilities.
No distribution toNo distribution toNo distribution toowners if, after givingowners if, after givingowners if, after givingeffect to it, LLC wouldeffect to it, theeffect to it, thenot be able to pay itscorporation would notcorporation would notdebts as they becomebe able to pay its debtsbe able to pay its debtsdue or its liabilitiesas they become due oras they become due orwould exceed its assets.its liabilities wouldits liabilities wouldexceed its assets.exceed its assets.
- Conversions and^ Conversion to LLC canConversion to LLC canCombinationsbe accomplished bybe accomplished byfiling conversionfiling conversioncertificate with the state.certificate with theWill be deemed to bestate. Will be deemed tothe same entity andbe the same entity andshould be tax free.should be tax free.To change form orTo change form ormerge into a corporationmerge into awould be treated as acorporation would becontribution of thetreated as a contributionpartnership’s assets inof the partnership’sexchange for stock.assets in exchange forstock.
Mergers of LLCs intoIn converting toIn electing to become another business entitiespartnership or LLC, theS corporation, built-inand other entities intocorporation will begain rules, LIFOLLCs are nowdeemed liquidated andrecapture, and passivespecifically allowed byassets contributed to theincome rules need to bestatute.new LLC or partnership.analyzed. See text fordiscussion of theseTo change form orissues. In converting tomerge into a corporationpartnership or LLC, thewould be treated as acorporation will becontribution of thedeemed liquidated andLLC’s assets inassets contributed to theexchange for stock.new LLC or partnership.
- Taxation Under^ No tax at entity level.^ No tax at entity level.Michigan CorporateIncome Tax (eff. Jan1, 2012)
No tax at entity level.^ No tax at entity level.^ Subject to 6 percent taxon corporation’s incometax base.
