Please can you give an opinion for option 1 and 2

Discuss the concept of Limited Liability in the corporate and business context - give an example of how it can be used to a business's advantage?

1 option

Limited liability is when a person's financial liability is limited to the amount invested in a business entity. A LLC, limited liability company, is a multiple person entity that along with various tax options offers liability protection for its principals. A LLP, limited liability partnership, is like a LCC and provides the same level of liability protection to its general partners. Since becoming recognized by states in the 1970s these entities have grown in prevalence because of the advantages they offer. One of these advantages is flow-through taxation. Flow-through taxation is when taxes are applied at the personal tax level so instead of taxing the LLC profits directly they are distributed to its members and then taxed, avoiding double taxation and maximizing profitability.

If a corporation racks up debt or suffers liability, shareholders, directors and officers would not be personally liable because of the protection of the corporate veil, one of the reasons to have a limited liable entity. There are however limits to this protection. Most lenders will require a personal guarantee, this requires a principal to back a loan with personal assets. There is also the possibility of the corporate veil to be pierced, this is when a court will allow a party to access personal assets of shareholders. An example of this is inCASE 15.4 Florence Cement Company v. Vitteraino, 292 Mich. App. 491 (2011)where the Court of Appeals of Michigan ruled in favor of Florence Cement Company, a subcontractor suing to recover $114,557 owed to them for services rendered, piercing the corporate veil of the principals of another entity, Shelby Property Investors which had failed to yield a profit. The court made this decision because Shelby Property Investors had a history of it's principals treating their personal liabilities as Shelby Property Investors' liabilities and vice versa as well as one of the three principals falsifying a sworn statement to the bank, thus using Shelby Property Investors for fraudulent purposes. The principals did not treat Shelby Property Investors as a separate entity so it was not seen as such in the eyes of the court.

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2 option

A Limited Liability (LLC or LLP) is a company whichprovides the same protections as a corporation to the principals, such as protection for their assets and pass-through taxes. This means that it would be more appealing to be part of an LLC than a General Limited Partnership because, if there are debts or liabilities on behalf of the company, the principals are not personally liable unless under specific circumstances and even then, not necessarily all partners are liable; much the same as a corporation. A Partnership provides no protection for personal assets, so any liabilities or debts against the company would be distributed evenly between the partners.

There is a tax benefit to a Limited Liability that it shares with Partnerships that corporations do not benefit from. A Limited Liability is a pass-through entity, meaning the principals do not pay corporate taxes. Profits are only taxed after they are distributed to the individual partners. Some tax laws allow Subchapter S corporations to avoid double taxation and receive a flow-through (similar to pass-through) taxation. However, to qualify for these tax benefits, the Subchapter S corporation must meet certain criteria which can be difficult for a corporation to fulfill simultaneously.

So a business may choose to exist as an LLP or LLC to avoid potential liabilities and double taxation without having to worry about fulfilling the criteria necessary to become an S corporation and maintaining those criteria.

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