One of the first decisions that a new business needs to consider is what type of entity it should be. Most commonly, the choice is among a sole proprietorship, a partnership, a corporation, a limited liability company, or a limited liability partnership. The attorneys at Maxey | Kaminski will review the specific needs of the owners so that we can recommend the best entity for your business.
A sole proprietorship is the simplest way for an individual to organize a business. However, few businesses choose to be sole proprietorships. Although a sole proprietorship can be formed simply and inexpensively, the owner has no personal liability protection from claims against the business. Doing so puts the entirety of the owner’s personal assets at risk.
There are two types of partnerships, limited liability partnerships and general partnerships.
Within limited liability partnerships, there are two types of partners: limited partners and general partners. Limited partners are not involved in the daily business operations, but invest capital. Their liability is limited to the amount of the investment. General partners within limited liability partnerships are personally liable for all debts of the partnership.
General partnerships are similar to sole proprietorships, however, they have two or more owners and they are formed by filing a DBA certificate. Commonly, general partnerships have written agreements that detail the rights and responsibilities of the owners.
Partners in a general partnership risk losing personal assets, since there is no personal liability protection, if there are claims that are brought against the partnership. In addition, each partner can be held personally liable for acts committed by the other partners within the partnership.
Corporations have traditionally been the most common approach for creating a business. Rights of corporations are well-defined by both statute and common law. Corporations have a broad range of options in how they are established and governed and are separate legal entities, distinct from the owners. They can provide personal liability protection to their owners.
Corporations are run by a board of directors comprising of a president, treasurer, and secretary. They also need to meet certain corporate procedure consisting of annual meetings of shareholders, board meetings, and maintaining minutes.
There are two types of corporations, C Corporations and S Corporations.
S Corporations pass taxes to shareholders resulting profits and losses included in the holder’s personal income taxes. This can be beneficial if there are significant losses during initial years of a corporation.
There are many advantages and disadvantages to each type of corporation and restrictions as to which businesses can claim as an S corporation. The attorneys at Maxey | Kaminski meticulously evaluate your case when selecting the correct type of cooperation with you.
Limited Liability Corporations and Limited Liability Partnerships
Limited Liability Corporations (LLCs) can provide personal liability protection for the owners. Additionally, LLCs can be flexible in the area of distribution of cash, assets, and the allotment of profits and losses. They can be operated with a Board of Directors and officers, or as a partnership, with members or managers overseeing the business.
Limited liability partnerships (LLPs) allow for personal liability protection in a partnership-style entity.