Choice of Business Entity (Part 1)
Congratulations, you have decided to start a new business. You are going to become an “entrepreneur”, a business owner. You have put together your business plan, located potential business premises, talked with your advisors, and are ready to get started.
You have talked with an attorney and an accountant and they have advised you to form a “business entity”. Now you have to decide which one is right for you. So, what are your choices? Following are just a few options:
Sole Proprietorship. You could own and operate the business and not form a separate entity. This is generally the “simplest” legal way of owning and operating a business. Other than obtaining the required business licenses, all you need to do is to put an “open for business” sign up and you are ready to go. The business is owned by only one individual and “dies” when the owner either stops doing business or dies. The individual owner has unlimited liability for all obligations of the business.
Partnership. If you have decided to go into business with other owners, you could form a partnership. There are two kinds of partnerships: general partnerships and limited partnerships.
In a general partnership, you and your partners will have unlimited liability for acts and obligations of the business, including those incurred by any of the partners in the business. If you have no agreement, the partnership will be governed solely by the laws regarding partnerships in your state. Without an agreement, if one partner dies or withdraws, the partnership terminates.
In a limited partnership, there must be at least one general partner who manages the affairs of the partnership and who will be liable for all the acts and obligations of the partnership. The “limited partners” may not participate in the management of the partnership and are treated as investors. They will not generally be liable for the acts and obligations of the partnership. The partnership must file a Certificate of Limited Partnership in the state in which it wishes to organize.
In proprietorships and general partnerships, there can be serious legal consequences to the individual(s) who operate the business. As pointed out, a sole proprietor, while “King” of the business, has unlimited liability for the obligations of the business. General partners are entitled to their share of the business income, but also have unlimited liability. Limited partners may not participate in management, but have limited liability.
So, what can a business owner do to limit his or her liability?
[To be continued, in Part 2, where we will discuss Corporations and LLCs, two of the more preferred ways of operating a business in order to minimize personal liability].
If you are starting a business and have any questions, please contact:
312-368-0100 or firstname.lastname@example.org.