Distinctions btwn Biz Orgs

Question 1

comparison btwn

SOLE PROPRIETORSHIP & CORPORATION

Answer 1

1. A sole proprietorship is a form of business in which one person owns all of the assets of the business.
2. The sole proprietorship generally does not exist as an entity apart from its owner, and thus little formality is required to form it.
3. However, since a sole proprietorship is not an entity distinct from its owner, its owner is personally liable for the business’s obligations and the business “entity” cannot continue beyond the life of the owner.
4. Management is centralized (since there is only one owner), and the owner is free to transfer his interest in the sole proprietorship at will.
5. All profits and losses from the business flow through directly to the owner.
6. Thus, if a person is interested in setting up a business with only one owner, desires little formality, is willing to risk personal assets, and wants to avoid double taxation, the sole proprietorship is worth considering as a business form.

Question 2

comparison btwn

PARTNERSHIP & CORPORATION

Answer 2

1. A partnership is similar to a sole proprietorship except that there are at least two owners of a partnership.
2. Little formality is required to form a partnership (just an intention to run as co-owners a business for profit).
3. Partnerships may have a few entity characteristics (e.g., property may be held in the name of the partnership, suits can be maintained in the name of the partnership), but generally partnerships are not treated as legal entities.
4. Partners are personally liable for obligations of the partnership
5. Management generally is not centralized, but rather is spread among the partners
6. Ownership interests of partners cannot be transferred without the consent of the other partners
7. A partnership generally does not continue beyond the lives of its owners (although the partners can agree to allow remaining partners to continue the partnership business after a partner leaves).
8. Finally, as indicated above, profits and losses of a partnership flow through directly to the partners unless the partnership elects to be taxed as a corporation on its federal tax returns.
9. Thus, if a person is interested in forming a business with more than one owner, does not want to bother with a lot of formality, does not mind sharing management rights with co-owners, does not mind putting personal assets at risk, etc., a partnership might be an appropriate entity to form.

Question 3

comparison btwn

LIMITED PARTNERSHIP & CORPORATION

Answer 3

1. A limited partnership is a partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.
2. A limited partnership can
   be formed only by compliance with the limited partnership statute.
3. There must be at least one general partner, who has full personal liability for partnership debts and has most management rights.
4. Thus, this form of business entity offers limited liability to most investors, centralized management (i.e., management by the general partner(s) rather than by all owners), and the flow- through tax advantages of a partnership (unless corporate-type taxation is elected), without the 100-investor limit of an S corporation.

Question 4

comparison btwn

LIMITED LIABILITY PARTNERSHIP & CORPORATION

Answer 4

1. A limited liability partnership (“LLP”) is a relatively new form of business entity that provides for the limited liability of all of its members
2. There is not a general partner who stands liable for the actions of the partnership.
3. Formation requires filing a “statement of qualification” with the secretary of state.
4. Otherwise, the entity is similar to other partnerships.

Question 5

comparison btwn

LIMITED LIABILITY COMPANY & CORPORATION

Answer 5

1. The limited liability company (“LLC”) is a relatively new form of business entity designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership (unless corporate-type taxation is elected).
2. Like a corporation, it may be formed only by filing appropriate documents with the state, but otherwise it is a very flexible business form: owners may choose centralized management or owner management, free transferability of ownership or restricted transferability, etc.