A business may take any of a number of forms, including:
- Sole proprietorship
- Limited liability company (or limited liability partnership)
Choosing the proper form for your business will provide the most protection for your personal assets and possibly lower your taxes. A Business Law or Corporate Attorney can help you with this choice.
View qualified Business Attorneys and Corporate Law Firms in your area to find Business and Corporate Lawyers to get help with this process.
A sole proprietorship is a business owned and operated by one individual. This form requires no additional paperwork, and the business’s earnings and losses are simply included on the owner’s taxes. One great disadvantage is that the owner is personally liable for the debts of, and legal actions against, the business (obligations), so his personal assets may be sought to satisfy those.
A partnership generally exists where more than one person shares the profits and losses of a business, and one person is personally liable. Like a sole proprietorship, the earnings and losses of a partnership are passed through (flow-through) to the partners. There are two types of traditional partnerships:
General partnership – where all partners are personally liable for the business’s obligations
Limited partnership – where only one partner must be a general partner, and the others may be limited partners
Limited partners are not personally liable for the partnership’s obligations, but they also have no authority to make decisions for the business. General partners are authorized to act for the partnership.
A corporation is a business where the owners (shareholders) are often not the managers (corporate officers) or decision makers (board of directors). A general corporation (the most common type) has a few unique characteristics:
- It must pay taxes on its earnings separate from the shareholders.
- The shareholders may have to pay an additional tax (double taxation) on corporate distributions (dividends).
- It may sue or be sued in its own name (separate legal personality).
- The shareholders are usually not personally liable for the business’s obligations (limited liability).
- The shareholders, as such, do not typically make decisions for the corporation (delegated management).
- Ownership in a corporation is often easier to transfer (sell) than with other businesses.
Another common type of corporation is the S corporation which is often used by smaller businesses that want to combine the limited liability of a corporation with the pass-through taxation of a partnership.
Other Limited Liability Businesses
A relatively new form, the limited liability company (LLC or L.L.C.) or limited liability partnership (LLP or L.L.P), has become very popular. Like the S corporation, this form combines the best of both worlds:
- Separate legal personality
- Limited liability
- No double taxation
- Pass-through taxation
- Management is retained with the owners
- Typically may have any number of owners (including one)