An entity may be formed to start a new business, combine existing businesses, undertake a specific project, raise capital, as part of an asset protection strategy, or to structure an investment.
The type of entity that is appropriate for any given situation can vary and the decision should not be made in haste or without a thorough review of the purpose the entity is intended to serve as well as the long term goals and expectations. There may be multiple options available depending upon the importance of various factors to the individuals forming the company.
Some of the factors that clients often consider include: the goals of the business, the risks involved with the business, the number and type of owners, the number of employees, growth, transferability of ownership, availability of capital, liability concerns, and the use of outside investors.
Some of the common entities are described below along with a brief description:
GENERAL PARTNERSHIP | A general partnership is the most basic entity and is simply defined as an association of two or more persons who join to carry on a business for profit. Each partner is jointly and severally liable for the partnership’s obligations.
LIMITED PARTNERSHIP | A limited partnership is a partnership with one or more general partners and one or more limited partners. This entity is designed to protect the limited partner’s assets at the expense of control over the partnership’s day to day operations. The general partner(s) are treated the same as a partner in a general partnership while the limited partner(s) are protected from liability for the partnership’s obligations under most circumstances.
LIMITED LIABILITY PARTNERSHIP | A limited liability partnership is a partnership in which the individual liability of the partners is limited. Generally, the partners are not liable for the partnership’s obligations.
CORPORATION | A corporation is a separate and distinct entity from its owners, or shareholders. The shareholders are insulated from liability for the corporation’s obligations and may or may not participate in management of the business.
S-CORPORATION | A subchapter S corporation, or S-Corp, is simply a corporation whose owners have elected to treat the company’s profits as partnership profits under Subchapter S of the tax code. The governance and management of the corporation are much the same as a regular corporation, however, the tax code imposes specific limitation on the types and number of shareholders an S-Corp may have.
PROFESSIONAL CORPORATION | A professional corporation is the same as a corporation described above but certain professions are required by law to form PC’s. For example, lawyers are required to form professional corporations if they choose to operate under the corporate form.
LIMITED LIABILITY COMPANY | A limited liability company is a separate entity from the business owners, much like a corporation. However, the rules governing LLC’s are much more flexible and the entity can be designed to operate how the owners choose.