There are many ways in which to organize your business. In a previous posting, I discussed the factors to consider when choosing the best way to organize your business. They include your need for limited liability, your tax situation, how you want to manage your company, and the amount of paperwork you’re prepared to tolerate.
Sole Proprietorship is the simplest form of business organization. As the name implies, a sole proprietorship consists of one person operating a business. Generally, no formal action or government filing is necessary before you can become a sole proprietorship. However, if operating the business under a name other than your own, you may need to file a dba (doing business as) or fictitious name statement with your local government.
A Partnership is comprised of two or more people operating a business. There are several different kinds of partnerships including the following:
A General Partnership is the “standard” form. Like the sole proprietorship, no formal action or government filing is necessary to form a general partnership. That can sometimes be problematic because you can form a general partnership without meaning to do so.
Every business is classified as a particular business entity type. If you are doing business and you have not taken steps to organize your business as a particular type, the law will classify you as a particular business type. This issue usually comes up when people who have pursued a business idea together disagree and find themselves in a lawsuit with each other over profits, ownership of company property, operations, or some other issue related to the business. They are often surprised to learn that their business is a general partnership and that their business dispute will be resolved in accordance with the general partnership laws of their state.
A Limited Partnership (“LP”) is a partnership consisting of limited partners and general partners. Limited partners share in the profits of the company but do not actively participate in the management of the company. Each limited partnership must have at least one general partner. The general partner manages the company and has unlimited personal liability with respect to the business. In many limited partnerships, the general partner is actually a corporation to avoid one individual carrying the load of unlimited liability.
A Limited Liability Partnership is often specifically designed for use by professions such as accountants, lawyers and architects. Generally the partners in the LLP are not responsible for the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts by another partner, employee or agent of the partnership. However, each partner is liable for other partnership debts and obligations as well as for his own negligence and malpractice and the negligence of employees working under his supervision.
Limited Liability Limited Partnership (“LLLP”) is a hybrid combining elements of the LP and the LLP. It’s often used by existing limited partnerships that want to convert to a business form offering more limited liability. In the LLLP, the general partner is not liable for the actions of the other general partner. The LLLP is relatively new and offered in only a few states which include Maryland, Delaware, Nevada, and Texas.
In my next posting, I’ll discuss the corporation and limited liability company forms and some of their variations.