Proper Business Entity
When forming a business there are multiple forms of entities available for the operation of small business and some considerations in selecting among them for a particular business venture. We’ll be discussing on choosing a proper business entity and understanding its significance.
- Sole Proprietorships
- General Partnerships
- Limited Liability Partnerships (LLP)
- Limited Partnerships (LP)
- Family Limited Partnerships (FLP)
- Limited Liability Limited Partnerships (LLLP)
- Limited Liability Companies (LLC)
- Subchapter C Corporations
- Subchapter S Corporations
- Professional Service Corporation and /or Professional Limited Liability Company
Now, let’s take a look at the entities and their significances. The sole proprietorship is a business enterprise owned by one person, which in turn signifies that the sole proprietor is to the full extent of their assets for debts of the business and therefore has unlimited liability. Any business can run as a sole proprietorship. A sole proprietorship 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.
A general partnership is an association of two or more persons (who may be natural persons or entities) to carry on a business as co-owners for profit. While it is more suitable to have a written partnership, a partnership can be formed through an oral or implied agreement. Partners owe a fiduciary duty of loyalty and duty of care to the partnership and the other partners. Partnership property is owned by the partnership as distinct from the partners individually, and the only transferable interest of a partner is the partner’s share of profits and losses of the partnership and the right to receive distributions. Another entity is a limited liability partnership which was created under and governed by.
This statute provides that a partnership may elect to become an LLP by filing with the department a statement of qualification. Next is a limited partnership which is created by one that must execute and file a certificate of limited partnership with the department. A general partner in a limited partnership 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.
Now, the soup gets thicker, a limited liability limited partnership is that it frees general partners of the limited partnership from personal liability and leaves the partnership with the sole obligation, still with me? And the long-term effect of this entity should be to eliminate the need to use a corporation or other limited liability entity as a general partner of a limited partnership. A family limited partnership is by definition composed of partners who are related. FLP interests have become very important and are widely used as transfer tax vehicles, so that value can be transferred to younger generations based on values that reflect discounts for various restrictions that can be incorporated into the partnership agreements. A limited liability company is a hybrid, cool huh? Because it is taxed like a partnership (pass through) but in many respects operated like a corporation.
Moreover, let’s talk about the Subchapter C Corporation. Basically, it is a corporation, which even though the liability of the stockholders to the value of the stock, Subchapter C corporations are subject to a corporate income tax on all net profits. To the extent owners receive dividends; they are subject to a separate income tax. Next on the agenda would be the Subchapter S Corporation, which are regular state-incorporated entities that have made an election under to be taxed as a “flow through” entity. In addition to the required election, these corporations must be domestic corporations and have no more than 100 shareholders, have only one class of stock, and have strict limits on what type of entities can be shareholders.
Determining which trusts can and cannot own “S” stock can be a bit challenging, but because subchapter S corporations are “tax advantaged,” have limited liability to the shareholders, and benefit from a long history in state law, they remain the entity of choice for most small businesses. Last but not least are the Professional Service Corporation and /or Professional Limited Liability Company, which are to be formed only by members of specific professions. There are limitations on the activities these entities may engage in other than passive investments. Only professionals of the same profession may own stock in the entity and while the names of the professionals, even if deceased, may constitute the entity name, it must also contain the word “chartered,” “professional association,” “P.A.,” “professional limited company,” “P.L.,” “limited company,” or “L.C.”
Now it is time to get started and see which one suits best for your business venture!