Limited Liability Company (LLC)
Regular Corporations
General Partnership
Limited Partnership
Summary
Many individuals have traditionally operated a business
as a sole proprietorship. A sole proprietorship exists when an
individual simply chooses to do business under a given business
name, or his or her own name. When two or more people engage in
a business operation, it is called a general partnership or joint
venture. While these forms of business operations work well for
many people, they often lack the structure people need to operate
efficiently.
There are several types of formal business entities. These include
corporations, limited liability companies, and limited partnerships,
and each have their own advantages. In general, these entities limit
personal liability for business debts and obligations. They also
have defined management, and are governed or controlled by the owner(s)
of the business.
There are significant tax differences and benefits associated with
each type business entity. A financial consultant, such as an accountant,
can best advise you on any tax questions. That individual should
work closely with your attorney to best address your needs.
Limited Liability Company (LLC)
All states permit limited liability companies. An LLC is a legal
entity separate and apart from its members. The members of an LLC
are not personally liable for the company's debts and obligations,
unless they have specifically agreed otherwise. An individual does
not lose that limited liability by being an active member of management.
An LLC maybe managed by a manager, or members designate a manager.
Alternatively, the members may directly control the LLC.
An LLC's ownership interest consists of monetary rights and rights
to management. The monetary right is the right to share in the profits
and losses, and receive distribution. Those rights are personal
property and can be transferred. However, there are restrictions
on the rights to participate in the management of an LLC.
An LLC is entitled to flow-through taxation. This means that
each member's share of profits and losses are taken on that member's
own personal income tax liability. Flow-through provisions may apply
to state taxes as well.
The LLC can have a perpetual existence and may include only one
person. For those persons wanting the protection of limited liability
and flexibility in control of a company, an LLC is often a very
good choice.
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Regular Corporations
A corporation is a business entity that is owned by its shareholders.
Shareholders are not personally liable for the debts of the corporation.
Governing occurs through a board of directors, consistent with applicable
state law. Corporate shares are generally easily transferrable,
and the entity provides for perpetual existence.
A Company may be known as either a "C" corporation or an "S" corporation.
Most large corporations are "C" corporations. The main difference
between a "C" corporation and an "S corporation concerns limitations
to the corporation's stocks and the tax treatment of profits and
losses.
A "C" corporation is not entitled to flow-through tax benefits.
The corporation must file a corporate tax return and pay corporate
tax. Therefore, there is a double taxation on a "C" corporation=s
income.
An "S" corporation is a corporation that has filed an election
with the IRS, consented to by all of the shareholders. There are
limitations in the number of shareholders and the types of stock
that can be issued. Only certain types of individuals or entities
may be shareholders. One potential advantage of an "S" corporation
is that that the "S" corporation is entitled to flow-through taxation.
The "S" corporation does not file a separate return. The profits
and losses pass through to the individual shareholders. See your
tax advisor in making these elections.
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General Partnership
A general partnership is an association of two or more people for
profit. While two or more individuals may work well together as
a partnership, there certainly must be a close relationship of trust.
Each partner is liable personally for the debts, liabilities and
obligations of the partnership. Each partner may bind the partnership.
Each is potentially liable for wrongful acts of other partners,
if those acts were done on behalf of the partnership. Each partner
has an equal voice in managing the business, though the partners
may make alternate arrangements.
Partnerships do enjoy the benefit of flow-through income taxation.
However, there is no continuity of existence in the event of the
death of one of the partners.
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Limited Partnership
A limited partnership is a partnership in which at least one general
partner is responsible for the management responsibilities and has
unlimited liability for the debts and obligations of the partnership.
The other investors are limited partners. Their role is passive.
While they are not entitled to participate in the management, their
liability is also limited.
The general partners control the limited partnership. Financial
rights may be freely transferred. Rights to inspect records, participate
in management, and the like, generally are not transferred without
consent of the other partners.
Limited partnerships, like general partnerships, may take advantage
of flow-through taxation.
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Summary
If you intend to remain in business for any substantial period of
time or wish to avoid certain liabilities, you should speak to an
attorney about forming and structuring a business entity.
The attorneys at Schuh & Goldberg, LLP can answer all of your
questions and assist you in choosing the best business entity for
you.
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