Small Business Center

Proprietorships

Proprietorships are the most basic and usually the simplest form of business operation. In a proprietorship, the owner holds title to the property, conducts business for profit, and is directly and personally liable for all obligations of the business. In most cases, the owner’s personal assets can be seized to satisfy proprietorship debts.

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General Partnerships

General partnerships are associations of two or more persons as co-owners to carry on a business for profit. The co-owners personally share the risks and rewards of all phases of the business. Because of tax rules and regulations, partnerships are increasingly complex entities. Each partner is jointly severally liable for the partnership’s obligations. Like proprietorships, a partner’s personal assets can be seized to satisfy partnership debts.

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Limited Partnerships

Limited partnerships are similar to general partnerships except that one or more of the partners has limited participation in the venture’s risk. This form of organization is a legal device that enables limited partners to be passive investors in a partnership, normally limiting their liability to the extent of their investment and enabling any general partners to manage and control day-to-day operations. A general partner’s assets can be seized to satisfy debts of the limited partnership.

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Corporations

Corporations are business entities created under state law. They are characterized as artificial persons created for the purpose of conducting business. As such, they can hire employees, enter into contracts, acquire assets and incur liabilities. An important feature is that they generally enable their owners (shareholders) to limit their liability to the extent of their investment in the corporation.

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S Corporations

S corporations are hybrid corporations that combine some of the tax advantages of a partnership with the liability protection of a corporation. Start-up businesses often consider S corporation status because profits and losses are passed through to the shareholders with no corporate tax imposed.

Strategy: Section 125 program

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Limited Liability Companies

Limited liability companies (LLC’s) are business entities created under state law that can be used in all states. Limited liability companies are owned by members and combine the tax advantages of a partnership with the liability protection of a corporation. As a result, the LLC structure is often compared to an S corporation. In many cases, LLC’s are more flexible than S corporations. The major drawback of LLC’s is that laws are new and relatively untested in non-tax matters. Each state establishes its own LLC rules and characteristics.

Strategy: Section 105 program
Strategy: Section 125 program

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Limited Liability Partnerships

Limited liability partnerships (LLP’s) are a special type of general partnership that exists under the laws of many states. Relatively new, they were enacted in response to the concern that a partner of a professional firm can be held liable for the malpractice of another partner in the same firm. LLP’s are an alternative available in some states that do not allow professional firms to organize as LLC’s.

LLP partners remain personally liable for the commercial and other obligations of the entity, their own acts and omissions, and for the acts and omissions of persons under their supervision. However, LLP partners generally not liable for acts and omissions by the other LLP partners and non-supervised employees. Thus, LLP’s provide less liability protection than LLC’s, but more than general partnerships.

Strategy: Section 105 program
Strategy: Section 125 program

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These pages are designed to provide accurate information in regard to the subject matter covered. It is furnished with the understanding that the publisher is not engaged in rendering legal or accounting advice. If legal advice or expert services are required, please contact your attorney or accounting professional.