When starting a new business, an owner may choose one of several different options as to the type of entity that can be used:
Sole Proprietorships are businesses owned and operated by a single person. This is the simplest form of organization. The proprietor is responsible for all business debts and liable for any actions by the company or its employees. Profits pass directly to the owner without any business income taxes.
General partnerships and joint ventures involve two or more partners who agree to share equally in all profits and losses. All partners are personally liable for everything done by any partner, the partnership, or its employees. Many partnerships fail when a partner dies or becomes disabled. A partnership agreement should therefore contain provisions for how the partnership will be terminated. All profits pass directly to the partners without any business income taxes.
Limited partnerships involve at least one general partner that is personally liable for the company and responsible for its debts. They are liable for only the amount of their investment in the business, but may receive bonuses, dividends, profit sharing, or other payments.
Limited liability companies are relatively new business entities in most states. LLCs limit the liability of their members, but can enjoy the same tax benefits as sole proprietorships and partnerships.
Subchapter S corporations allow small businesses to insulate shareholders from many corporate debts and liabilities. Nevertheless, S corporations are limited in the number and types of shareholders they may have. Profits pass directly to shareholders without any business income taxes.
Subchapter C Corporations include most large, publicly held businesses. Shareholders are protected from most corporate debts and liabilities. Profits are distributed to shareholders as dividends, and therefore are subject to double taxation. C Corporations must pay business income taxes, and shareholders must pay personal income taxes on dividends.
The kind of business structure one chooses will carry consequences affecting several key business areas:
Taxes – What amounts and types of taxes are owed and by whom
Management – Who manages the business
Liabilities – Who is ultimately liable for actions of the business
Succession – How ownership can be transferred by sale, gift, dissolution or death
The type of business organization should be chosen carefully and thoughtfully. Although revocable, the ability to switch between different types of organization as the business changes may be limited.
For more information, please see the accompanying articles Corporations and Corporate Responsibilities, Texas Limited Liability Companies-Formation and Advantages, Benefits of a Limited Partnership, Registered Limited Liability Partnerships and Limited Liability Companies, Conversion of a Corporation to a Limited Partnership
This informational memorandum from the law offices of Thomas D. Solomon, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the area of covenants not to compete. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
