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Business Structures

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Sole Proprietorship – A sole proprietorship (SP) is a business entity with only one owner. An SP offers the most governance flexibility as the law does not place any requirements on how the business is to be internally governed. The owner of an SP can run the business as he or she sees fit. Furthermore, SP’s receive “pass-through taxation”. That is, income received by the SP is passed through the SP and goes straight to the owner. Thus, only the owner pays income tax on the income of the business, instead of dealing with the double taxation attributable to corporate structures. One important point about SP’s is that there is no personal asset liability protection. Creditors of an SP can come after the owner’s personal assets to satisfy the debts of the business.

 

General Partnership – General Partnerships (GP) occur when two or more individuals come together to engage in business for profit. There is no requirement that the partners enter into an agreement with each other, nor does the law require that the partnership be governed in a particular manner. A GP has all the same benefits and draw backs as an SP except for one especially important point: In a GP, each and every partner can bind the GP (the entity) to contracts/agreements entered into by the partner that are within the normal scope of the GP. In a GP, each owner has the authority to bind the GP to contractual obligations; and just as the SP lacks personal asset protection, so too does the GP. Caveat: Be sure you know and trust your partners in a GP! If a partner of yours binds the GP to an agreement that the GP cannot satisfy, the GP creditors can come after your personal assets to satisfy the debt.

 

Limited Partnership – Limited Partnerships are formed by filing appropriate documentation with the state. There are two types of partners in an LP: General partners and Limited partners. A General partner within the LP context is exactly the same as a partner in a General Partnership (discussed above). A General partner has the authority to control the management of the partnership and is personally liable for repayment of partnership obligations. On the other hand, a Limited partner does have personal liability protection. However, for a partner to be “limited”, and thus have personal liability protection, that partner is not permitted to manage the partnership. All management duties and obligations are vested solely in the General partner (sometimes referred to as the “Managing” partner). Should a Limited partner engage in prohibited managerial activities, that Limited partner may be viewed as a General partner, and as a result, may become personally liable for the repayment of partnership debts. LP’s receive the same pass through taxation as an SP and GP.

 

Limited Liability Partnership – Limited Liability Partnerships (LLP) are formed by filing appropriate documentation with the state. Partners in a LLP receive the pass-through taxation of an SP and GP, but have personal asset protection. Each partner can bind the LLP to contractual agreements, but creditors can only, except for limited situations, reach the assets of the LLP for satisfaction of a debt (each partner is liable only up to his/her interest in the business). Also, LLP’s have the same flexibility of governance as an SP.

 

Limited Liability Corporation – Limited Liability Corporations (LLC) are almost identical to LLP’s except for their designation – i.e., L.L.C vs. L.L.P and for the fact that an LLC can elect to be taxed like a corporation. Operating Agreements are the generally used to lay out how the LLC will be governed.

 

Corporation – Corporations generally offer the most personal asset protection, while at the same time requiring adherence to strict governance rules. Corporations have shareholders who are the “owners” of the company. These “owners” have the greatest protection from attachment of personal assets to satisfy business debts than any other type of owners. However, the laws regarding Corporations are extensive and they are rigid. Failure to adhere to strict governance rules may render a corporation being treated as a partnership for liability purposes – i.e., failure to adhere to corporate formality renders shareholders liable for company debts. Shareholder agreements, Articles of Incorporation, Bylaws, and other agreements are often necessary. Also, unless otherwise qualified, corporations receive double taxation – that is, the corporation is taxed on profits and then shareholders pay taxes on dividends. Double taxation has significant advantages when dealing with large corporations. For smaller businesses, however, pass-through taxation is the preferred choice.


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