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Fundamentals of Corporate Finance ...

4th Edition
Jonathan Berk + 2 others
ISBN: 9780134475561

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Chapter
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BuyFindarrow_forward

Fundamentals of Corporate Finance ...

4th Edition
Jonathan Berk + 2 others
ISBN: 9780134475561
Summary Introduction

Limited Liability Company (LLC):

A limited liability company (LLC), is similar to the partnership firm but here, members who run the company consist of only limited partners who enjoy the privilege of limited liability in the organization who can also run the business as a managing member.

Limited Liability

Limited liability is a concept where the shareholders (who are also considered as the owners of the company) are responsible for the debts of the company limited only to the value of the shares they own in that company.

Partnership Company

In a partnership firm, more than one owner runs the business. In this case, all the partners have to bear the liability and their partnership ends in case if any one of the partners withdraws or dies, unless any alternative is mentioned in their agreement.

Limited Partnership Company

A limited partnership company has two types of partners namely, the general partners and the limited partners. The general partners have the same features like the partners of a normal partnership firm. They are liable personally for the debts and losses of the company. On the other hand, the limited partners enjoy the privilege of having a limited liability towards the organization i.e., their liability is limited only to the amount of investment they have done in the organization. This is known as a limited partnership company.

To Identify:

The meaning of a limited liability company (LLC) and how it differs from a limited partnership firm.

Answer

Solution:

A limited liability company (LLC) is a type of business organization where the maximum liability that a partner is supposed to pay is the amount of investment they do in the company. In other words, their liability is limited.
On the other hand, a limited partnership firm has the limited partner having the same feature of limited liability, but along with that they have general partners as well who share the debt obligation of the company personally.

Explanation
  • The partners of a limited liability company (LLC) enjoy the privilege of having limited liability.
  • This simply means that the amount of liability that they have in the business is limited to their investment in the same.
  • The liabilities of the company cannot be extended to the partner’s personal property unless they invest that property in the business.
  • The debt that the partners are liable to pay is limited to their amount of investment and the company cannot use their property to pay off their debts.
  • On the other hand, a limited partnership firm have two types of partners namely, the general partners and the limited partners.
  • The general partners are similar to the partners of a partnership firm where they are personally responsible for the debts of the company.
  • But the limited partners enjoy the privilege of having limited liability.
  • Their liability is limited to the amount of investment they have made in the organization.
Conclusion

A limited liability company (LLC) is a type of business organization where all the partners have the liability limited to the amount they have invested. Alternatively, a limited partnership firm have two types of partners where the general partners have the same obligations but the limited partners have the privilege of enjoying limited liability.

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