Choosing a Business Form 247assignment of one’s liabilities to a newly formed corporation does not act to re-
lease the original obligor without the consent of the obligee. The best advice
here is to form the corporation before incurring any liability on its behalf. Most
entrepreneurs are surprised at how little it actually costs to get started.
Limited Partnerships
In keeping with its hybrid nature, a limited partnership borrows some of its as-
pects from the corporation and some from the general partnership. In sum-
mary, each general partner has unlimited joint and several liability for the
debts and obligations of the limited partnership after exhaustion of the part-
nership’s assets. In this respect, the rules are identical to those governing the
partners in a general partnership. Limited partners are treated as stockholders
in a corporation. They have risked their investment, but their personal assets
are exempt from the creditors of the partnership.
As you might expect, however, things aren’t quite as simple as they may
initially appear. In limited partnerships, it is rather common for limited part-
ners to make their investments in the form of a cash down payment and a
promissory note for the rest, partly for reasons of cash f low and partly for pur-
poses of tax planning. This arrangement is much less common in corporations
because many corporate statutes do not permit it and because the tax advan-
tages associated with this arrangement are generally not available in the corpo-
rate form. Should the limited partnership’s business fail, limited partners will
be expected, despite limited liability, to honor their commitments to make fu-
ture contributions to capital.
In addition, it is fundamental to the status of limited partners that they
have acquired limited liability in exchange for foregoing virtually all manage-
ment authority over the business. The corollary to that rule is that a limited
partner who excessively involves her- or himself in management may forfeit
limited liability and be treated, for the purposes of creditors, as a general part-
ner, with unlimited personal liability. Mitigating this somewhat harsh rule, the
Revised Uniform Limited Partnership Act increased the categories of activi-
ties in which a limited partner may participate without crossing the line. Fur-
thermore, and perhaps more fundamentally, in states that have adopted the
Revised Act, the transgressing limited partner is now only personally liable to
those creditors who were aware of the limited partner ’s activities and detri-
mentally relied upon his or her apparent status as a general partner.
Limited Liability Companies
One of the major benefits of employing the LLC form is that it shields all
members and managers from personal liability for the debts of the business.
However, even though the LLC is relatively new on the legal scene, courts
can be expected to apply most of the same doctrines they use in piercing the
corporate veil to pierce the veil of the LLC as well. Furthermore, it can be