Advantages and Disadvantages of LLCs and LLPs

LLCs and LLPs have gained great popularity in recent years, but larger companies still find substantial

advantages in being structured as C corporations. This is primarily due to the benefits of raising capital to

support long-term growth. It is interesting to note that LLC and LLP organizational structures were essentially

devised by attorneys. They generally are rather complicated, and the legal protection offered to their

ownership principals may vary from state to state. For these reasons, it is usually necessary to retain a

knowledgeable lawyer when establishing an organization of this type.

Obviously, when a company is choosing an organizational structure, it must carefully evaluate the advantages

and disadvantages that come with any form of doing business. For example, if an organization is considering a

corporation structure, it would have to evaluate the trade-off of having the ability to raise greater amounts of

funding to support growth and future expansion versus the effects of double taxation. Yet despite such

organizational concerns with corporations, time has proven that the value of most businesses, other than

relatively small ones, is very likely to be maximized if they are organized as corporations. This follows from the

idea that limited ownership liability reduces the overall risks borne by investors. All other things being equal,

the lower a firm’s risk, the higher its value.

Growth opportunities will also have a tremendous impact on the overall value of a business. Because

corporations can raise financing more easily than most other types of organizations, they are better able to

engage in profitable projects, make investments, and otherwise take superior advantage of their many

favorable growth opportunities.

The value of any asset will, to a large degree, depend on its liquidity. Liquidity refers to asset characteristics

that enable the asset to be sold or otherwise converted into cash in a relatively short period of time and with

minimal effort to attain fair market value for the owner. Because ownership of corporate stock is far easier to

transfer to a potential buyer than is any interest in a business proprietorship or partnership, and because

most investors are more willing to invest their funds in stocks than they are in partnerships that may carry

unlimited liability, an investment in corporate stock will remain relatively liquid. This, too, is an advantage of a

corporation and is another factor that enhances its value.