Limited Liability Company (LLC)
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Peter and Andrew are contemplating the formation of a new business, therefore they must consider some important factors such as entity formation, liability, taxation, capitalization, management, operation, and eventual dissolution. One of the main considerations facing Peter and Andrew is whether or not they want their personal assets exposed as payment of any business debts in the event that the hunting and fishing lodge business fails, or worse yet, has pending lawsuits for personal injuries sustained at the lodge. Kleinberger (2008) writes that “an LLC combines attributes of four different types of business organizations: general partnerships, limited partnerships, corporations, and closely held corporations” (Kleinberger, 2008, p. 473).
The beneficial advantage of forming an LLC is that personal assets are protected (Melvin & Guerra-Pujol, 2018, p. 473) whereas those assets would be exposed, jointly and severally, if instead a general partnership is formed (Ibid, p. 448). Moreover, Peter and Andrew will likely require raising capital from a lender, and will probably be required to place the aforementioned land as collateral to secure the financing. Considering that the property on which the lodge will be built belongs to their family, namely their grandfather, it would be wise for them to fully protect it so that the land remains a significant part of the family legacy for future generations. Hence, it is my opinion that an LLC is the most favorable option for their new business.
The next important consideration facing Peter and Andrew is whether or not they should allow Paul to join them as the operations manager. A management agreement will outline the duties and responsibilities of each member, and will also designate the business as either a member-managed LLC (all members have equal authority for business decisions) or a manager-managed LLC (manager is responsible for the daily operations, including the sole authority for making non-major business decisions) (Ibid, p. 474). If Peter and Andrew choose to have Paul join them in this new business as its manager, the brothers would then be precluded from making any further operational business decisions. It would be my recommendation that they decide against having Paul join them, especially as a manager, given the fact that he does not share their Christian values and probably will not, as the manager, honor their desire to allow church worship retreats at the lodge. In the alternative, however, perhaps they could hire Paul as a consultant on all aspects of operating a hospitality business so that he can impart his knowledge to both Peter and Andrew.
Lastly, as a pass-through entity, Peter and Andrew must decide how profits and losses are to be distributed and taxed (either as a partnership or corporation), which is routinely outlined in the operating agreement. According to LegalZoom.com, “a pass-through entity maintains a capital account for each member, and profits are split by allocating amounts to this account” (Masters, n.d., para. 2). Moreover, profits and losses are recorded as self-employment income on the individual tax returns of both Peter and Andrew for taxation purposes. The only decision remaining to be made at that time will be whether or not they take a draw on the profits or leave them in the business as working capital to help grow the business. As we are reminded in Proverbs 13:11, “wealth gained hastily will dwindle, but whoever gathers little by little will increase it” (Proverbs 13:11 ESV).
References
Kleinberger, D. S. (2009). THE LLC AS RECOMBINANT ENTITY: REVISITING FUNDAMENTAL QUESTIONS THROUGH THE LLC LENS. Fordham Journal of Corporate & Financial Law, 14(2), 473-490. Retrieved from http://ezproxy.liberty.edu/ login?url=https://search.proquest.com/docview/89068003?accountid=12085
Masters, T. (n.d.). How are profits split in an LLC? Retrieved from http://info.legalzoom.com/ profits-split-llc-20063.html
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Reply 2.
What personal liability will the owners have for the obligations of the business (contracts, debts, lawsuit judgments, etc.…)
In that I chose the limited liability company for the owners, it is more likely that the owners will have limited liability for their company debts. In the case of something happening where the company does fall into debt, the creditors ‘will only go after the company’s assets and not the owners’ personal assets’ (Bulkat, 2018). The company can decide to make themselves equally and personally responsible for their debt by co-signing on the business loan. If one of the brothers wanted to leave or if they both wanted to sale, LLC is going to ensure a smooth transfer through a business continuation agreement. Meaning if one of the owners dies or becomes bankrupt the LLC will have to dissolve (Staff, 2018).
Should Paul be included as a co-owner, or in some other role? On what do you base that decision?
Because of Paul’s hesitation in the past towards churches, the brothers’ would probably be better off to offer Paul a high rank in their business where he will get paid handsomely as the company grows. I believe this because the brothers’ have a great opportunity to minister to people by letting them use their property for worship and growing in their faith; I believe God will bless a company that does this. There is a chance that they can sit down with Paul and come up with some contracts and agreements to be able to do this and then they still may be able to consider him to be a legal co-owner of the business. But I do not think it is wise to go into business with someone who doesn’t share your views on some important issues in the world where that may effect your business and personal life.
How would contributions to the new business be valued?
New contributions, as in key employees or investors, could be detrimental to a new business.
How would profits and losses be distributed?
At year-end the LLC must allocate profits or losses to each member. This is how the IRS ensures that the company is taxing their income. Profits, however, do not have to be distributed in the rules of a limited liability company (Master, 2016).
It, S. (n.d.). What Is an LLC (Limited Liability Company)? Retrieved May 06, 2018, from https://www.incorporate.com/limited_liability_company.html
Bulkat, B. (n.d.). When You Might Be Personally Liable for LLC or Corporate Debt. Retrieved May 06, 2018, from https://www.nolo.com/legal-encyclopedia/personally-liable-llc-corporate-debt-bankruptcy.html
Staff, I. (2018, April 09). Limited Liability Company – LLC. Retrieved May 06, 2018, from https://www.investopedia.com/terms/l/llc.asp
Master, T. (2016, October 26). LLC & Profit Distribution. Retrieved May 06, 2018,
