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What are the various types of business entities?

A: The Sole Proprietorship

            The sole proprietorship is a business owned and managed by one person and is the simplest business form under which one can operate a business.  The sole proprietorship is not a legal entity.  It simply refers to a natural person who owns a business and is personally responsible for its debts and obligations.  A sole proprietorship can operate under the name of its owner or it can do business under a fictitious trade name.  The fictitious name is simply a trade name or operating name of a company that differs from its legal name-it doesn't create a legal entity separate from the sole proprietor owner.

            The sole proprietorship is a popular business form due to its simplicity, ease of setup and nominal cost.  A sole proprietor need only register his or her name and secure local licenses, and the sole proprietorship is ready for business.  A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts.  So if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.

            The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law.  The sole proprietor owner will typically have customers write checks in the owner's name, even if the business uses a fictitious name.  Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner.  Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.

Advantages of the Sole Proprietorship

• Owners can establish a sole proprietorship instantly, easily and inexpensively.
• Sole proprietorships carry little, if any, ongoing formalities.
• A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
• Owners may freely mix business and personal assets.

Disadvantages of the Sole Proprietorship

• Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business.
• Owners can't raise capital by selling an interest in the business.
• Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.

The Partnership

            A partnership is a business form created automatically when two or more persons engage in a business enterprise for profit.  A partnership-in its various forms-offers its multiple owners flexibility and relative simplicity of organization and operation.  In limited partnerships and limited liability partnerships, a partnership can even offer a degree of liability  protection to limited partners.

            Partnerships can be formed with a handshake-and often they are.  Responsible partners, however, will seek to have their partnership arrangement memorialized in a partnership agreement, preferably with the assistance of an attorney.  Because partnerships can be formed so easily, partnerships are often formed accidentally through oral agreements . A partnership is formed whenever two or more persons engage jointly in business activity to pursue profit.

Advantages of the Partnership

• Owners can start partnerships relatively easily and inexpensively.
• Partnerships do not require annual meetings and require few ongoing formalities.
• Partnerships offer favorable taxation to most smaller businesses.
• Partnerships often don't have to pay the minimum taxes that are required of LLCs and corporations.

Disadvantages of the Partnership

• All owners are subject to unlimited personal liability for the debts, losses and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships).
• Individual partners bear responsibility for the actions of other partners.
• Poorly organized partnerships and oral partnerships can lead to disputes among owners.

The Limited Liability Company (LLC)

            A Limited Liability Company (LLC), like a corporation, is a separate legal entity that under most state statutes is permitted to carry on any lawful business, purpose or activity except certain insurance or banking activities.   As a separate legal entity, an LLC is distinct from its owners, who are known as "members."  Thus, an LLC may in its own name, acquire and dispose of real or personal property, enter into and perform contracts, participate with others in business opportunities and sue and be sued.

            The appeal of the LLC form lies in the fact that it provides its members with the primary favorable attributes of both corporations and partnerships, without the related drawbacks.   If properly formed, an LLC is similar to a corporation with respect to shielding its members from personal liability for the debts and obligations of the company.   However, unlike corporations,  LLCs are not burdened with onerous double federal taxation obligations.   Indeed, for such tax purposes, an LLC may elect to receive the pass-through tax treatment reserved for partnerships or, for single member LLCs, be completely disregarded.

Advantages of the LLC

• LLCs do not require annual meetings and require few ongoing formalities.
• Owners are protected from personal liability for company debts and obligations.
• LLCs enjoy partnership-style, pass-through taxation, which is favorable to many small businesses.

Disadvantages of the LLC

• An LLC is not an appropriate vehicle for businesses seeking to eventually become public, or to raise money in the capital markets.
• LLCs require annual fees and periodic filings with the state.
• Some states don't allow the organization of LLCs for certain professional vocations.

The Corporation

            Corporations are business entities that are separate from their owners.   Corporate owners are referred to as shareholders, and the shares may be privately or closely held, or they may be offered for sale to the public.  Corporations are formed by submitting Articles of Incorporation to the state in which the corporation is doing business and they are taxed separately from their owners at the corporate tax rate.

            Because corporations are separate entities, the debts and liabilities of the corporations are also separate from those of the owners. This separation is sometimes called a "corporate shield."

            Corporations are ideal vehicles for raising investment capital.  A corporation seeking to raise capital need only sell shares of its stock. The purchasing shareholders pay cash or property for their stock, and they then become part owners in the corporation.

            A corporation's shareholders, directors, officers and managers must observe particular statutory formalities in a corporation's operation and administration.  For example, per statute, decisions regarding a corporation's management must often be made by formal vote and must be recorded in the corporate minutes.  Meetings of shareholders and directors must be properly noticed and must meet quorum requirements.  Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.

Advantages of the Corporation

• Owners are protected from personal liability for company debts and obligations.
• Corporations have a reliable body of legal precedent to guide owners and managers.
• Corporations are the best vehicle for eventual public companies.
• Corporations can more easily raise capital through the sale of securities.
• Corporations can easily transfer ownership through the transfer of securities.
• Corporations can have an unlimited life.
• Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to "double taxation" on profits.

Disadvantages of the Corporation

• Corporations require annual meetings and require owners and directors to observe certain formalities.
• Corporations are more expensive to set up than partnerships and sole proprietorships.
• Corporations require annual fees and periodic filings with the state.

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