Forms of Business Organization
Prior to choosing how to structure a business, you will have to know what your options are. The Callan Law Firm, P.C. assists clients with choosing, executing, amending and complying with their organizing documents. To speak with an attorney, contact us now. To learn more about your business organization options, read on below.
The following are the main business designations and types (corporations and non-corporations):
1. Sole proprietorship: a business consisting of a single owner (which may itself be a business entity), not in a separately recognized business form.
2. General partnership is a partnership in which all the partners are jointly and separately liable for the debts of the partnership. In most U.S. states, it can be created by agreement without requiring a public filing. The partners may themselves be legal entities or individuals.
3. LP (limited partnership): a partnership where at least one partner (the general partner, which may itself be an entity or an individual) has unlimited liability for the LP’s debts) and one or more partners (the limited partners) have limited liability (which means that they are not responsible for the LP’s debts beyond the amount they agreed to invest). Limited partners generally do not participate in the management of the entity or its business.
4. LLP (limited liability partnership): a partnership where a partner’s liability for the debts of the partnership is limited except in the case of liability for acts of professional negligence or malpractice. In some states, LLPs may only be formed for purposes of practicing a licensed profession, typically attorneys, accountants and architects. This is often the only form of limited partnership allowed for law firms (as opposed to general partnerships).
5. LLC, LC, Ltd. Co. (limited liability company): a form of business whose owners enjoy limited liability, but which is not a corporation. Allowable abbreviations vary by state. Note that in some states Ltd. by itself is not a valid abbreviation for an LLC, because in some states (e.g. Texas), it may denote a corporation instead. See also Series LLC. For U.S. federal tax purposes, in general, an LLC with two or more members is treated as a partnership, and an LLC with one member is treated as a sole proprietorship.
6. PLLC (professional limited liability company): Some states do not allow certain professionals to form an LLC that would limit the liability that results from the services the professionals provide such as doctors, medical care; lawyers, legal advice; and accountants, accounting services; architects, architectural services; when the company formed offers the services of the professionals. Instead those states allow a PLLC or in the LLC statutes, the liability limitation only applies to the business side, such as creditors of the company, as opposed to the client/customer service side, the level of medical care, legal services, or accounting provided to clients. This is meant to maintain the higher ethical standards that these professionals have committed themselves to by becoming licensed in their profession and to prevent them from being immune (or at least limit their immunity) to malpractice suits.
7. Corp., Inc. (Corporation, Incorporated): used to denote corporations (public or otherwise). These are the only terms universally accepted by all 51 corporation chartering jurisdictions in the United States.
8. Professional corporations (abbreviated as PC or P.C.) are those corporate entities for which many corporation statutes make special provision, regulating the use of the corporate form by licensed professionals such as attorneys, architects, accountants, and doctors.
9 Doing Business As (DBA): denotes a business name used by a person or entity that is different from the person’s or entity’s true name. DBAs are not separate entities and do not shield the person or entity who uses the DBA as a business name from liability for debts or lawsuits. Filing requiments vary and are not permitted for some types of businesses or professional practices. DBAs can be sole proprietorships, or can be used by corporate entities to reserve “brand names”, such as those of chain stores owned and operated by a holding company or other “umbrella”.
Sole Proprietorships and Partnerships
For many new businesses, the best start-up structure is either a sole proprietorship or. if more than one owner is involved, a partnership. A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debts, loans, loss etc.
The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s. It is a “sole” proprietorship in contrast with partnerships (which have at least 2 owners).
A sole proprietor may use a trade name or business name other than his, her or its legal name. They will have to legally trademark their business name, the process being different depending upon country of residence
Similarly, a partnership is simply a business owned by two or more people that hasn’t filed papers to become a corporation or a limited liability company (LLC). A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations thereof.
Partnerships exist within, and across, sectors. Non-profit, religious, and political organizations may partner together to increase the likelihood of each achieving their mission and to amplify their reach.
Partnerships present the involved parties with special challenges that must be navigated unto agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and succession, how success is evaluated and distributed, and often a variety of other factors must all be negotiated. Once agreement is reached, the partnership is typically enforceable by civil law, especially if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable typically draw up a partnership agreement. Not ready to speak with an attorney about formation of a partnership, take a look at our shop to review a partnership agreement template.
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.
Generally speaking, limited partnerships are costly and not the proper business form for the small businessman, but they can offer some major benefits to its users. The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership.
As in a general partnership, the GPs have actual authority, as agents of the firm, to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership’s business. As with a general partnership, “an act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners.”
The LP organization is most common among law firms, accounting firms, film production companies, finance firms and real estate investment projects or in types of businesses that focus on a single or limited-term project. They are also useful in “labor-capital” partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. In such situations, liability is the driving concern behind the choice of LP status. The LP is also attractive to firms wishing to provide shares to many individuals without the additional tax liability of a corporation. Private equity companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Enterprise Products and Blackstone Group (both of which are public companies), and Bloomberg L.P. (a private company).
A corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that’s required. While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter corporation, a popular variation of the regular C corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.
Limited Liability Company
A limited liability company (LLC) is the U.S.-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs do not need to be organized for profit. In Virginia, to form an llc you must file articles of organization with the appropriate state government agency. However, while Virginia does not require that file an “operating agreement” to govern the operations of an LLC, the use of an operating agreement can help ensure proper liability and asset protection and provide rational rules for member interaction, compensation and dissolution.
Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.
In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders. However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. So long as the LLC and the members do not commingle funds, it would be difficult to pierce this veil. Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.
For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes, and an individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return. On the other hand, income from corporations is taxed twice, once at the corporate entity level and again when distributed to shareholders, thus more tax savings often results if a business formed as an LLC rather than a corporation.
An LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832. After electing corporate tax status, an LLC may further elect to be treated as a regular C corporation (taxation of the entity’s income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members) or as an S corporation (entity level income and loss passes through to the members). Some commentators have recommended an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings)
To speak with an attorney about your corporate formation decisions, contact The Callan Law Firm, P.C. now.