Choosing the Proper Entity Structure for Your Business
When it comes to choosing the right entity structure for a business, owners must consider a number of factors to arrive at the decision. Factors such as organizational structure, legal liability to third parties, and tax implications must match up with the goals of the owners and their business priorities. Below are some of the more common business entity structures.
Partnerships
Partnerships are for-profit businesses that are formed by two or more persons. Each person in the partnership shares in the profits and losses of the business. Because of the broad definition of “person” in partnership statutes, the entity sharing in the partnership may very well be another business entity. There are three forms of partnerships available: (1) general partnerships, (2) limited partnerships, and (3) limited liability partnerships. General partnerships comprise of partners who are active in the daily operations and are liable as owners for the debts and liabilities of the partnership. Limited partners are comprised of one general partner who manages daily business activities and is liable to the business with a limited partner that does not participate in the business and does not incur any liability. Limited liability partnerships have a similar structure to limited partnerships, but are permitted more general partners. Partnerships are not taxable entities as the income from the partnership is taxed proportionally to the partners who share in the profits.
Limited Liability Companies
A limited liability company offers the structure of a corporation, however, the members of the company are not liable for debts and liabilities of the entity. To form an LLC a document called the articles of organization are filled with the governing state agency. Often, the name of the company must bear the initials ‘LLC’ to signify to the world that the members of the company are not personally liable for the debt and liabilities of the business. At the same time, like corporations, third parties can “pierce the corporate veil’ to reach the personal assets of the members of the limited liability company in case of fraud or other intentional acts. Negligence claims usually do not qualify to give way to personal liabilities. For the purposes of taxation, the profits and losses “pass through” to the individual members of the LLC.
Corporations
A corporation is the most complex entity of the three discussed here. As a result of its complexity, they are highly regulated by state and federal law. Corporations usually comprise of shareholders who direct the business. There are two types of corporations: (1) S corporations and (2) C corporations. It is important to note that the type of corporation selected can affect the size of the company and how it is financed. An S corporation is like an LLC where the personal assets of the owners are protected from liabilities of the corporation. Similar to LLCs, owners of an S corporation enjoy pass through taxation. Alternatively, a C corporation is taxed separately from its owners.
Fort Lauderdale Business Attorney
Attorney Brendan A. Sweeney has years of experience advising and assisting individuals with their business formation needs. Entity formation is the most important aspect of starting a business. Attorney Sweeney provides individualized advice to suit your business needs. Contact us now for a consultation.
Resource:
law.cornell.edu/wex/partnership
