Entrepreneurial Protection

Partnership

A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships.

• The level of personal liability protection varies by state; many times, at least one partner has unlimited liability.
• There are relatively few formal requirements.
• It provides a flexible management and operational structure.
• Income and losses are passed through to owners who are taxed individually.
• Partnerships are recommended for owners wanting minimal formalities and maximum flexibility. Need to be in position to afford good insurance and want to structure business as employees climbing up to partner level.

Limited Liability Company

A limited liability company is a business structure that protects its owners from personal responsibility for its debts or liabilities. It is seen as a hybrid structure that combines features of both a corporation and a partnership. Owners of this entity type are considered members or managers.

• The Member(s) of the business are not typically liable for the debts of the LLC.
• Formal meetings and minutes are not required, but the business is required to file annual state registration.
• The requirements on managing the business are flexible. Management duties and responsibilities are typically outlined in an operating agreement. The operating agreement is not required, but strongly suggested.
• By default, there is no tax at the entity level. As a result, income and losses are passed through to the members. This means any income or loss experienced by the business will be associated with the individual’s tax return. LLCs have the option to elect to be taxed as a C or S- Corporation.
• This entity selection is recommended for owners wanting strong liability protection with minimal corporate formalities, and the simplicity of pass-through taxation.

Corporation

A corporation is a business entity having legal authority to act as a single person, distinct from the stockholders/shareholders who own it, and having rights to issue stock and exist indefinitely.

• The shareholders (owners) of the company are not typically liable (responsible) for the debts of the corporation.
• There are several formalities as corporations are regulated by the state in which they are located. There are complex tax and legal requirements, and it must have a formal board of directors, conduct shareholder meetings, create, and maintain meeting minutes, bylaws and keep records of all actions. This information is required as a part of the annual state registration.
• The business is managed by the board of directors, who are usually elected by the shareholders. Board of Directors can appoint officers (think CEO or CFO), who run the daily operations.
• The business is taxed at the entity level, but if dividends are distributed, dividend income is also taxed at the individual level.
• This entity type is recommended for owners needing maximum tax and ownership flexibility combined with liability protection, and don’t mind adhering to the corporate formalities and record keeping burdens.

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