Business Structure

In a partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Yes, it’s hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front howmuch time and capital each will contribute, etc.

• Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax returns.
• Prospective employees may be attracted to the business if given the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills.
• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
• General Partnership
  • Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
• Limited Partnership and Partnership with Limited Liability
  • Limited means that most of the partners have limited liability (to the extent of their investment), as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operatingretail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
• Joint Venture
  • Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, as well as distribute accumulated partnership assets upon dissolution of the entity.

Source: Small Business Administration www.sba.gov

A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

• Shareholders have limited liability for the corporation’s debts or judgments against the corporations.
• Generally, shareholders can only be held accountable for their investment in stock of the company.
  (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
• Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
•  The process of incorporation requires more time and money than other forms of organization.
•  Corporations are monitored by federal, state, and some local agencies and as a result may have more paperwork to comply with regulations.
•  Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region, as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages and you will be liable for all of the payroll taxes on the total amount.

Source: United States Small Business Administration www.sba.gov

A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

• Shareholders have limited liability for the corporation’s debts or judgments against the corporations.
• Generally, shareholders can only be held accountable for their investment in stock of the company.
  (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
• Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
• The process of incorporation requires more time and money than other forms of organization.
• Corporations are monitored by federal, state, and some local agencies and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region, as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages and you will be liable for all of the payroll taxes on the total amount.

Source: United States Small Business Administration www.sba.gov

A limited liablility partnership (LLP) is a general partnership that elects to be treated as an LLP by registering with the Secretary of State. Many attorneys and accountants choose the LLP structure since it shields the partners from vicarious liability, can operate more informally and flexibly than a corporation, and is accorded full partnership tax treatment. In a general partnership, individual partners are liable for the partnership’s debts and obligations whereas the partners in a limited liability partnership are statutorily provided full-shield protection from partnership liabilities, debts and obligations. It allows the members of the LLP to take an active role in the business of the partnership, without exposing them to personal liability for others’ acts except to the extent of their investment in the LLP. Many law and accounting firms now operate as LLPs. In some states, with certain exceptions, the LLP is only available to attorneys and accountants.

Limited partnerships are very different from general partnerships, and are usually set up by companies that invest money in other businesses or real estate.

Limited partnerships have at least one general partner who controls the company’s day-to-day operations, exercise managerial power, contribute capital, share in the profits and are held personally liable for all company debts and legal obligations. They also have passive partners called limited partners.

State laws vary, but the following is an example of a state statute governing dissolution of a partnership:

“620.157 Nonjudicial dissolution.–A limited partnership is dissolved, and its affairs must be wound up, upon the happening of the first to occur of the following events:

1. At the time specified in the certificate of limited partnership.
2. The happening of an event specified in writing in the partnership agreement.
3. When all partners have given their written consent.
4. The happening of an event of withdrawal of a general partner, unless at the time there is at least one other general partner and the written provisions of the partnership agreement permit the business of the limited partnership to be carried on by the remaining general partner and that partner does so; but the limited partnership is not dissolved and is not required to be wound up by reason of any event of withdrawal if, within 90 days after the withdrawal, all partners agree in writing to continue the business of the limited partnership and to the appointment of one or more additional general partners if necessary or desired.
5. Entry of a decree of judicial dissolution under s. 620.158.620.158 Judicial dissolution.–On application by or for a partner, the circuit court may order dissolution of a limited partnership if it is not reasonably practicable to carry on the business in conformity with the partnership agreement.”

Source: http://definitions.uslegal.com/p/partnerships/