Shawn and Jasmine want to start a partnership to sell hand-woven sweaters. Jasmine’s parents would like to invest, but they do not wish to be subject to liability for losses in excess of their capital contribution. Jasmine’s mother tells Shawn and Jasmine that if she invests, she expects to have a significant say in the management of the business. Should Shawn, Jasmine, and Jasmine’s parents enter into a limited partnership with the parents limited partners. Why or why not? Would a limited liability company be a good option, and why or why not?
Yes, in this scenario, a limited partnership with partners would be a good option as it would allow Jasmine’s parents to invest in the business as passive investors. A limited partnership would limit Jasmine’s parents’ liability for losses in excess of their capital contribution, allowing them to have no major involvement in the management of the business. On the other hand, a limited liability company (LLC) could be a better option because it provides personal liability protection to all members of the business, including Jasmine’s parents. Contrary to that condition, if Jasmine’s parents wish to have a significant say in the management of the business which could not be the possibility due to their investment in the business as passive investors, forming an LLC would not be the best option. This is because every member of the business has an equal say in management unless otherwise specified in the operating agreement.
It is important to note that both LLCs and limited partnerships have different legal requirements, management structures, and tax implications, so planning and careful consideration are necessary to ensure the best suits the needs of all members of the business involved. Therefore, it is important to comply with all regulatory and legal requirements for forming and entity the chosen entity to avoid legal issues and penalties (Burkhard, 2003). Additionally, in this scenario, it is crucial to have a clear understanding and agreement among all parties involved regarding the roles, responsibilities, decision-making processes, profit sharing, and exit strategies to avoid potential misunderstandings or conflicts with Shawn or Jasmine’s parents. Furthermore, it is advisable in such a condition to regularly review and update the documents and legal requirements governing the partnership or LLC to ensure that they reflect any changes in the business or its ownership structure and to maintain legal compliance.
In summary, the choice between a limited partnership and an LLC ultimately depends on the specific needs and preferences of Shawn, Jasmine, and Jasmine’s parents. Building on the scenario, it is recommended that Shawn, Jasmine, and Jasmine’s parents consult with a legal professional to fully understand the legal requirements and implications of both options before making a final decision.
Burkhard, J. R. (2003). LLC Member and Limited Partner Breach of Fiduciary Duty Claims: Direct or Derivative Actions. Journal of Small and Emerging Business Law, 7, 19.