Legal

Fundi Mwamba - Attorney at Law
Blackentrepreneurship.com’s Legal Expert
 
Business Entities (Part One of a Three-Part Monthly Series)
One of the first questions an entrepreneur may ask is “what business entity is best for my business?”
 
Although the answer depends on the objectives of the business, key considerations include how the entity and its owners will be taxed and the extent to which the entity will shield the owners from liabilities arising out of its activities.
 
The following are the most common business entities in the U.S.:

• Corporation
• General Partnership
• Limited Liability Company
• Limited Partnership
• Limited Liability Partnership

CORPORATION
 
The primary advantages of operating a business as a corporation are as follows:

• Limited liability of shareholders
• Centralization of management
• Flexibility in capital structure
• Status as a separate legal entity

The primary disadvantages of operating a business as a corporation are as follows:

• Expense of formation and maintenance
• Statutorily required formalities
• Tax treatment—double taxation for the C-corporation and restrictions on the S-corporation; state franchise taxes

GENERAL PARTNERSHIP
 
The primary advantages of operating a business as a general partnership are as follows:

• Shared financial commitment
• Ability to pool resources, expertise and utilize strengths
• Limited start up costs

The primary disadvantages of operating a business as a general partnership are as follows:

• Partners are generally personally liable for business debts and liabilities
• Each partner may also be liable for debts incurred by decisions made by, and actions taken by, the other partner or partners
• Disagreements in management plans, operational procedures and future vision for the business

LIMITED LIABILITY COMPANY (“LLC”)
 
The primary advantages of operating a business as an LLC are as follows:

• Has the same liability protection against third parties as a corporation.
• Can be taxed as partnership, with single level, flow-through taxation
• Flexibility of business deals and sharing of profits, losses, capital
• Losses, which are common to a start-up business venture, can pass through the entity and be deducted directly by the owners of the business
• All members/owners of the LLC can be protected from liability

The primary disadvantages of operating a business as an LLC are as follows:

• Some states require that a dissolution date be listed in the articles of organization. This date may be amended. Further, certain events, such as death of a member, a member leaving, bankruptcy, etc. can be a dissolution event. A corporation has unlimited life and these events are not dissolution events for a corporation.
• Documents must be filed at the state level to create an LLC, which is not the case with a general partnership.

LIMITED PARTNERSHIP (“LP”)
 
The primary advantages of operating a business as an LP are as follows:

• Much easier to attract investors as limited partners
• Allows for general partners to use their expertise, make key decisions and manage the business
• Limited partners can leave the business or be replaced without the need for the limited partnership to be dissolved.

The primary disadvantages of operating a business as an LP are as follows:

• Filings, formalities and state requirements
• General partners assume personal liability

LIMITED LIABILITY PARTNERSHIP (“LLP”)
 
The primary advantages of operating a business as an LLP are as follows:

• LLPs provide a legal structure to the establishment of the business. From a capital investment standpoint, limited partners are shielded from the liability in that their liability is dependent upon the amount of capital invested. In addition, dividends distributed to all partners are reported on the partners’ personal income tax return.
• As in any partnership, an LLP must draft a partnership agreement, which governs how the business is operated. There is no requirement to set a termination date of the partnership agreement.
• As a separate legal entity, LLPs may own property, sue, and be sued in the LLP’s name.

The primary disadvantages of operating a business as an LLP are as follows:

• Since an LLP is a legal entity, the formation of an LLP requires more legal documentation than in a general partnership.
• If an LLP drops or loses a partner, the business is automatically deemed dissolved.

Choosing the type of entity that is best for your business can be complicated, but the more informed you become, the better. It is strongly suggested that you consult with an attorney that has experience setting up different types of business entities, and can help you determine the best entity for your business, before settling on one of the entities discussed above.