Different business entities have different characteristics in different areas, including: ownership and control; liability; taxation, reporting requirements; formation and dissolution requirements; distribution of profits, and so on. The type of entity selected when forming a business is important to get right, as making a wise selection will help ensure the success of the business.
One way to break down business types is: incorporated and unincorporated. Distinguishing between business forms based on incorporation is useful because of the special characteristics and rules that apply to corporations.
The simplest type of unincorporated entity to form is a Sole Proprietorship, which is a single individual who has sole control and responsibility for the business. No filing is required with a Sole Proprietorship. General Partnerships, which are associations of two or more people who are co-owners of a business, are also very easy to form. All that is required is an agreement between partners, which doesn't need to be in writing.
With a general partnership, there is an equal share in management and profits, though partners may agree otherwise. Each partner is an agent in a general partnership, and there is no limitation on liability, unless the partnership elects for limited liability partnership status. Limited partnerships are partnerships in which there is one or more general partners and one or more limited partners, who have limited liability and are not active in management of the business. Limited Partnerships are formed by filing a special certificate with the state.
In addition to these types of partnerships, there is also the Limited Liability Partnership, which gives general partners--whether in a general partnership or a limited partnership--more protection from personal liability. Limited liability status may be claimed in a state filing only when certain criteria are met. Limited Liability Partnerships involve annual registration fees, which is an additional cost.
On the border between partnerships and corporations are Limited Liability Companies, which are owned by members who have the same protection from personal liability as owners of corporations, while sharing the same tax treatment and management options as partnerships. LLCs are formed by filing a Certificate of Organization with the state, along with other required forms. Like LLPs, LLCs must meet certain requirements to be registered and require annual registration.
In a future post, we'll take a brief look at incorporated business entities and the importance of working with an experienced attorney in establishing a business and addressing legal issues as they arise.