The type of entity that is best for your business depends on many factors. This decision can have a significant impact on the business’s future profitability and growth, its tax liability, and the level of asset protection afforded to its owners. Below is an overview of the most common business structures.
The sole proprietorship is the simplest and least regulated of all business structures. For legal and tax purposes, the sole proprietorship’s owner and the business are one and the same. The liabilities of the business are personal to the owner, and the business terminates when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.
A partnership consists of two or more persons who agree to share profits and losses. It is simple to establish and maintain; no formal, written document is required in order to create a partnership. If no formal agreement is signed, the partnership will be subject to state laws governing partnerships. However, to clarify the rights and responsibilities of each partner, and to be certain of the tax status of the partnership, it is important to have a written partnership agreement.
Each partner’s personal assets are at risk. Any partner may obligate the partnership, and each individual partner is liable for all of the debts of the partnership. General partners also face potential personal legal liability for the negligence of another partner.
A limited partnership is similar to a general partnership, but has two types of partners: general partners and limited partners. General partners have broad powers to obligate the partnership (as in a general partnership), and are personally liable for the debts of the partnership. If there is more than one general partner, each of them is liable for the acts of the other general partners. The liability of limited partners, however, is “limited” to their contribution of capital to the business. As with a general partnership, limited partnerships are flow-through tax entities.
Limited Liability Company (LLC)
The LLC is a hybrid type of business structure. An LLC consists of one or more owners (“members”) who often actively manage the company’s business affairs. The LLC contains elements of both a traditional partnership and a corporation, offering the liability protection of a corporation, with the tax structure of a sole proprietorship (if it has only one member) or a partnership (if the LLC has two or more members).
Corporations are more complex than either a sole proprietorship or partnership and are subject to more state regulations regarding their formation and operation. Like LLCs, corporations limit the owners’ personal liability for company debts. There are two basic types of corporations: C-corporations and S-corporations. There are significant differences in the tax treatment of these two types of corporations. S-corps have certain restrictions on the number and types of shareholders in order to remain eligible for this tax status.
If you are a new business and would like to discuss your options, please do not hesitate to contact Westchester County business law attorney Claudia Pollak today at (914) 908-6220.