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When starting up your business the first thing to prioritize and accomplish is choosing your legal structure for your business. Each legal structure offers organizational options with different tax and liability issues.
There are many forms of legal structures, but in this article we’re going to focus on the ‘top dogs’, which are sole proprietorships, general and limited partnerships, and limited liability companies. Each structure offers a unique and different tax and liability benefit. If you’re unclear as to which business format is right for you, we advise you to discuss options with a business attorney.
Is one person operating a business as an individual, which can decide on a fictitious name, register the name under, and thereafter conduct business under the fictitious name, which is, by definition, a name other than the sole proprietor’s legal name.
Profits are taxed as income to the owner personally. The owner has complete control of the business, but faces unlimited liability for its debts.
Very little government regulation or reporting required is within this business structure.
An association of two or more persons (who may be natural persons or entities) to carry on a business as co-owners for profit.
Partnerships are subject to relatively little regulation and are fairly easy to establish, preferably though, through a written partnership, but a partnership can be formed through an oral or implied agreement.
Under a general partnership each partner is liable for all debts of the business.
Profits are taxed as income to the partners based on their ownership percentage.
Has both the rights and liabilities of a general partner in a general partnership, but a limited partner, generally has limited liability to third parties (unless that partner participates in the control of the business), and often the limited partner has limited rights under the agreement.
Limited partnerships have become quite popular because they provide the tax benefits of a general partnership while limiting the liability of the limited partners.
However, there are two types of partners:
A general partner has greater control in some aspects of the partnership. General partners have no limits on the dividends they can receive from profit, so they sustain unlimited liability.
Limited partners can only receive a share of profits based on the proportional amount of their investment and liability is similarly limited in proportion to their investment.
LLCs and LLPs
The limited liability company is a new business form, which combines selected corporate and partnership characteristics while still maintaining status as a legal entity distinct from its owners.
Since it’s a separate entity it can sustain assets, incur liabilities, conducts business, and limits liabilities for the owners.
The limited liability partnership is similar to the LLC, but it is for professional organizations.