There are many factors to consider when choosing how you will operate your business.
As a second installment of our business law series, this post provides information on some of the requirements of the various business structures and information on liability of the individuals depending on which business entity is formed. You can review the difference in the various types of entities by checking out the first post in the series Types of business structures.
Business structure Required to file/register with the WA Secretary of State?
Sole proprietor No
General partnership No
Limited Liability Company (LLC) Yes
Limited Partnership (LP) Yes
Limited Liability Partnership (LLP) Yes
Who has liability?
Sole proprietor-Sole proprietor has unlimited liability.
General partnership-Partners have unlimited liability.
Limited Liability Company (LLC)-Members aren’t typically liable for the debts of the LLC.
Corporation-Shareholders aren’t typically responsible for the debts of the corporation.
Limited Partnership (LP)-At least one general partner has unlimited liability.
Limited Liability Partnership (LLP)-Partners aren’t typically liable for the debt of the LLP.
Who manages the business?
Sole proprietor-Sole proprietor has full control of management and operations.
General partnership-Typically each partner has an equal voice unless otherwise arranged.
Limited Liability Company (LLC)-Members have an operating agreement that outlines management.
Corporation-Managed by the directors, who are elected by the shareholders.
Limited Partnership (LP)-Limited partners are excluded from management unless they serve on the board of directors.
Limited Liability Partnership (LLP)-All partners have the right to manage the business directly.
How are federal taxes generally determined?
Sole proprietor-Not a taxable entity. The sole proprietor pays all taxes.
General partnership-Not a taxable entity. Each partner pays taxes on his or her share of income, and can deduct losses against other sources of income.
Limited Liability Company (LLC)-Depending on structure, there is no tax at the entity level. Income/loss is passed through to members.
Corporation-Depending on structure, taxed at the entity level. If dividends are distributed to shareholders, dividends are also taxed at the individual level.
Limited Partnership (LP)-Files taxes as a separate entity, must meet certain criteria to avoid being taxed as a corporation.
Limited Liability Partnership (LLP)-Taxed as a separate entity. Must meet certain criteria to avoid being taxed as a corporation.
I always love discussing people's new business ideas. If you want to chat about your new business and forming an entity, feel free to email or call me 425-885-4066.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and should not be construed as legal advice from Leos & Gilkerson, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a licensed lawyer.