When starting a business, you may choose from several types of business entities. Choosing the proper business entity for your business is vital to the success of your project.
One of the primary considerations in selecting a business organization is protection of the owners of the business from liability. Other considerations include tax treatment by the federal and state governments, management structure, future ownership, and capitalization.
State laws determine how particular entities should be set up and conduct their business. These laws are very specific and set out the legal responsibility of each business form. Taxing authorities and regulatory agencies also have laws that pertain to business.
A very brief description/definition of each of the types of entities is set forth below:
A general partnership is a partnership in which all partners participate fully in running the business and share equally in profits and losses. While forming a general partnership is easy (there are no filing fees or filing formalities), partners of a general partnership are typically jointly and severally liable for all debts and obligations of the general partnership.
A limited liability partnership (LLP) is like a general partnership. The LLP allows all the partners to take an active role in the management of the business while offering members some liability protection from actions of the other partners and the partnership and the partnership employees. LLPs are most often used by groups of professionals such as doctors, accountants, or architects.
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Limited partnerships are partnerships comprised of one or more persons who control the business as general partner(s), and one or more persons (limited partners) who contribute capital and share profits but who do not manage the business and are liable only for their amount of their contribution to the limited partnership.
A limited liability company (LLC) is a statutorily created entity comprised of members with limited liability. Limited liability companies can be managed by either their members or managers. Other than the S-Corporation, this is the most likely form of entity formation for entrepreneurs and professionals.
A corporation is an entity that has the authority to act as a single person distinct from the shareholders that make up the corporation. Some of the advantages to operating a corporation include its limited liability for shareholders, centralization of management and status as a separate legal entity.
The S Corporation is a corporation that chooses to be taxed under Subchapter S of the Internal Revenue Tax Code. Being an S Corporation is a tax matter only. S Corporations are “tax pass through” business entities, meaning their profits and losses are reported by their owners on the owner's’ personal tax returns. This form, along with the LLC, is the most likely to be recommended form of incorporation.
Each of these entities have important tax considerations that vary state to state. It is essential that you work together with your legal, financial, and accounting professionals to determine which type of entity is right for your business. Call us to get a LIFT Start-Up Session scheduled, and we’ll meet with you privately to choose the right entity plus other legal, insurance, financial and tax systems for your next business.
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