CHOOSING A BUSINESS ENTITY
There are many considerations to be made in choosing under what structure to operate a business in
The sole proprietorship is the most basic of business entities. The sole proprietor is an individual in business for him or herself. The sole proprietor is entitled to all the business earnings, and is personally responsible for its losses. While the regulatory costs of sole proprietorship are minimal, this is counterbalanced by the unlimited personal liability of the business owner. If the business is sued and loses, the owner will be responsible for the loss (not taking into account insurance and other issues).
A partnership consists of two or more persons engaged together in the conduct of a business. The partnership is usually commenced by the creation of a partnership agreement outlining the rights and duties of the parties. The partners agree on how they are going to divide any gains or losses of the partnership. The individual partners are jointly and severally liable for the debts of the partnership. Further, the partners can be sued individually by third parties for the actions of the partnership. If a partner was only partially at fault, the partner can in turn sue the other partners for a contribution based on their proportion of fault. Partnerships gains and losses are reported on the partners’ personal tax returns.
One of the most important aspects of the partnership agreement is what happens when one partner dies or wishes to leave the business. Is that partner or the partner’s family entitled to any compensation? Will the partner remain liable on any outstanding or future partnership debts? Will the partnership dissolve?
Voting issues are another important aspect of the partnership agreement. What happens when there are only two partners and they both disagree as to a course of action? How are disputes resolved?
THE LIMITED LIABILITY PARTNERSHIP
Another form of partnership is the Limited Liability Partnership (LLP). The LLP consists of general partners and one or more limited partners. While the general partners remain liable for debts in the same way as a regular partnership, the limited partners are only liable to the extent of their investment in the partnership. Further, the limited partners usually have no ability to manage or control the day to day functions or decisions of the partnership.
The corporation is still one of the most popular forms of business entity. The corporation generally provides its owner with protection from liability from the corporation debts. Unlike the sole proprietorship or the partnership, if the corporation is sued and loses, the individual owners are only liable up to their investment in the corporation – they are not personally liable.
The corporation is a relatively more expensive form of business entity and the owners must comply with government regulations. Yearly meetings must be held and minutes kept. A corporation must appoint a registered agent to accept service of process (generally a lawsuit) for the corporation. The corporation creates Articles of Incorporation and Bylaws, outlining how the corporation will be run. Directors and Officers are elected by the shareholders. Shareholders purchase stock from the corporation representing ownership rights in the corporation. A corporation can be either privately held or publicly traded.
One aspect of the corporation that makes it a more expensive business entity is that it is subject to double taxation. The corporation is taxed at the corporate level and the shareholders are taxed again on any distributions they receive from the corporation.
In order to avoid double taxation, some small corporations elect to be treated as partnerships by the IRS for tax purposes – the Subchapter S Corporation, referring to a section of the tax code.
Overall, when structured correctly, a corporation is a very valuable form of business entity.
THE LIMITED LIABILITY COMPANY
A relative newcomer, and not yet available in all states, the Limited Liability Company (LLC) combines aspects of a corporation and a partnership. The LLC provides its members with limited liability and provides flexibility in the operation of the company. The LLC does not issue stock, but instead provides ownership interests. This makes it less liquid than a corporation. The LLC also allows for pass-through taxation (the members are only taxed once).
There are also a number of other business entities, from not-for-profit corporations, to Limited Limited Liability Limited Partnerships, to Professional Associations, and choosing these, as with the forms above, will be based on the circumstances of the individual business.
The law Offices of Michael D. Stewart can assist you in these and a variety of other issues. You may contact us at:
Michael D. Stewart, Esq. Law Offices of Michael D. Stewart
335 S. Biscayne Blvd., #UPH00
© Copyright 2006 Michael D. Stewart