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Which Business Entity is Right for You? (Part 4)A doubleshot of business news espresso with extra froth A small business blog featuring tips to help entrepreneurs succeed in the small business world. Topics include family business, human resources, marketing, money, networking, operations, ownership, startup, taxes and technology. Share Your Thoughts! PART 4 – PARTNERSHIPS The first thing you should be aware of when it comes to General Partnerships, whose owners are known as GPs (general partners), is that it is managed by all partners and all partners are liable for the negligence and/or debts of the business. Each and every partner has a say in how the business is run and, even if only one partner makes a mistake, each and every partner takes the heat for it. Of course, this liability is only a problem if you or your partners cannot be trusted to run the business. Partnerships are often used when franchising a business or when all partners contribute equally to the success of the business, such as a law firm. Taxes are paid through each partners personal income tax. There are no costs or formalities for designating your business as a partnership entity, and the only document required is a Partnership Agreement, which is crucial and should include: • Amount each partner will invest in the business and when said investments will be made (upfront, annually, etc.); Typically profits are divided equally among members, but you can designate otherwise in your partnership agreement. Keep in mind that giving one partner a larger percentage of the business assets does indicate that they have a stronger say in the decisions regarding the operation of the business. It is usually in the best interest of all involved to stick to equal distribution. A partnership lasts only as long as a good relationship between partners. It can be dissolved if the partners no longer wish to work together using the methods indicated in the partnership agreement, which can include the sale of the business as well as dismissing one member and bringing another in. Partnerships also have the option of including one or more limited or silent partners (LPs). LPs are individuals who invest in the partnership but, based upon the Partnership Agreement, are limited in their involvement in the operation of the business. Also, LPs’ legal liability is generally limited to how much they invest, so they can basically reap the benefits of the partnership (i.e. profits) without being responsible for the debts. It is important that you examine all of the available options for business entity designation and determine which is best for you and your business before you get the ball rolling. Please consult with a lawyer before before making any legal decisions. Part 1: Sole Proprietorships Sources: Picking the Right Business Partner The Warning Signs of a Doomed Partnership Which Business Entity is Right for You? (Part 3) Which Business Entity is Right for You? (Part 2) By Michelle Cramer Wednesday, March 17th, 2010 @ 7:00 PM CDT Startup, Business Law | Which Business Entity is Right for You? (Part 3) Share Your Thoughts! PART 3 – LIMITED LIABILITY COMPANIES Limited Liability Companies, or LLCs, combine several features of Corporations and Partnerships, but are neither. Often people call them “limited liability corporations,” but that is incorrect. The owners of an LLC are termed “members” rather than partners or shareholders. The number of members is unlimited and can be a combination of individuals, corporations or other LLCs. LLC members are not held liable for the negligence and/or debt of the LLC they have ownership interest in, unless they sign a personal guarantee. Like a corporation, an LLC is an entirely separate existence from the individuals involved. Another benefit is that there are fewer requirements for an LLC. It is not necessary to keep meeting minutes or record resolutions, as in a corporation, and you are not required to have a board of directors or make officer designations for the members. Some states do have minimal requirements for an LLC, but what those are varies from state to state. Typically, you are also required to file Articles of Organization and Operating Agreement when registering your business as an LLC. The designated distribution of income to the members is entirely flexible, leaving the division to be anywhere from 50-50 to 10-90, and, of course, open for division among any number of members. As a member, you also have much more access to the assets of the company. You can take assets out for personal and/or business use without incurring tax liability. Owners also have more leeway when it comes to writing off business losses when associated with an LLC. The lifetime of an LLC is limited. If any member dies or files bankruptcy, the LLC is dissolved. Additionally, an LLC is not nearly as appealing to possible investors, so if you are considering going public with you company, or issuing shares to your employees someday, an LLC is not the route you should go. However, if legal liability protection and one level of taxation are primary concerns for your business owners – who consist of multiple and diverse individuals and/or businesses – than an LLC is probably just right for you. Part 4: Partnerships Sources: Which Business Entity is Right for You? (Part 4) Which Business Entity is Right for You? (Part 2) Avoid Legal Trouble Which Business Entity is Right for You? (Part 1) By Michelle Cramer Tuesday, March 16th, 2010 @ 7:00 PM CDT Startup, Business Law | Which Business Entity is Right for You? (Part 2) Share Your Thoughts! PART 2 - CORPORATIONS Corporations are considered a legal entity which exists separately and independently from the individuals who create and manage it. Only the corporation itself is legally liable for any negligent actions or debts it may produce. The individual shareholders are not liable. There are a number of requirements for a corporation: • Must have an elected board of directors or officers Advantages The flexible transferability of shares is another large benefit. Ownership of shares in a corporation can be sold, transferred, given or inherited by simply endorsing and signing over an individual’s stock certificates. It is not necessary to file deeds or retitle anything. You would also benefit from the increased ability to raise investment capital. It’s much easier to attract new investors to back your business if it is registered as a corporation because of the limited liability of shareholders and the easy transfer of shares. Disadvantages If your business is large, or headed that direction, you might want to consider establishing your business as a Corporation. This is an especially preferred choice if you want to market your business to a number of investors, because the “Inc.” following the name of your business can be very appealing. Part 3: Limited Liability Companies Sources: Which Business Entity is Right for You? (Part 3) IRS to Audit S-Corporations Which Business Entity is Right for You? (Part 4) Which Business Entity is Right for You? (Part 1) By Michelle Cramer Monday, March 15th, 2010 @ 7:01 PM CDT Startup, Business Law | |