Business Transactions

Alphabet Soup of Business Entity Forms. Part One. Sole Proprietorships and Partnerships.

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.

Here’s a description of some of the business entity forms you can choose:

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:

Choosing the Best Way to Organize Your Business

There’s not one business entity form that is best for all situations. The choice depends on several factors, the most important of which 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. You also have to consider the laws of the state – which can vary significantly - in which you organize.

Don’t Get Your Corporate Veil Pierced

Limited liability within a business context means that creditors – including people who sue your company – can only reach the assets of the business. Corporations and limited liability companies (LLCs) offer limited liability to their owners. 

There is a concept called piercing the corporate veil or setting aside limited liability. When that happens you lose the limited liability offered by a corporation or LLC and your personal assets become vulnerable to creditors. A set-aside of limited liability can occur if the company is undercapitalized, if you co-mingle personal and business assets, or if you don’t follow certain formalities mandated by state law or your own organizational documents.

To minimize the risk of a set-aside of limited liability, companies should do the following: 

• Follow the procedures specified in your bylaws, operating agreement, or other organizational documents.


• Keep your personal assets and financial records separated from business assets and financial records. This includes setting up a separate bank account for the company and paying company bills from the company bank account. Also, if you pay business expenses by credit card, it’s helpful to obtain a credit card issued in the company’s name. 


• Make sure it is the company and not the individual owners that is listed as the contracting party for all contracts dealing with the business. 

 

In Which State Should You Organize Your Business?

A United States business owner may organize his company under the law of the state in which he resides or under the law of any other state. There are certain states that have attractive elements in their business law statutes.

Many would place Delaware at the top of the list. Delaware has a well-respected, progressive body of corporate and business entity law and has likely addressed every category of business dispute within its court system. For businesses seeking to minimize tax liability, Nevada and Wyoming, which have no corporate taxes, might be attractive.  In addition, both Nevada and Wyoming allow shareholders to remain anonymous and, like Delaware, have a corporation-friendly court system.

Nevertheless, sometimes, there's just no place like home . . .

Potential Advantages of the Series LLC

A Series LLC is a limited liability company with separate membership series. You can place different assets in each series. The intent is for companies with multiple lines of business or distinct assets to be able to separate those assets while avoiding the administrative costs and time associated with organizing a separate LLC for each asset. 

For example, if you own several parcels of real estate, you can put one parcel in each series. A film production company could place a separate film in each series. A venture funds whose investors don’t want to mix speculative investments with more established businesses could place separate investments in separate series.