Selecting Form of Business Entity
Business Entity Type Guide : Mazis Law Group Los Angeles
There are several different forms of business entities such as sole proprietorships, general partnerships, limited partnerships, joint ventures, limited liability companies, and corporations. Determining the proper legal structure is the first step in starting a business. There are nontax and tax considerations to take into account in choosing the proper business entity. The nontax considerations include management and control, limitation of liability, transferability of interests, among others.
Management and Control
In the case of a sole proprietorship, all management and control rests with the proprietor-owner. Typically, in a general partnership, the partners share equally in the management and control unless described differently in the partnership agreement. Unlike a general partnership, with a limited partnership, the general partners have the exclusive right to manage the business. A limited liability company is either managed by all of its members or by one or more managers that do not need to be members of the limited liability company.
The management and control of a corporation can vary widely. It depends on the number of shareholders, the size of the corporation, and the type of corporation. The shareholders of a corporation delegate the management and control by electing a board of directors and the board of directors then appoint officers for the day to day management of the corporation’s business.
Limitation of Liability
One of the main factors taken into consideration by someone opening a new business is the limitation of liability. A sole proprietorship does not limit the liability of the owner for the business debts and obligations putting the personal assets of the owner at risk. General partnerships do not limit the liability of the partners for the losses of the business as well. The partners are jointly liable for the business losses and the wrongful acts or omissions of any partner in the ordinary course of business. In a limited partnership, the general partner(s) are liable for all of the debts and obligations of the partnership while the limited partner(s) are only liable up to the amount of capital contributions. Limited liability company members and shareholders of a corporation typically do not have personal liability for the debts and obligations of the business.
Transferability of Interests
Ownership interest in a sole proprietorship is freely transferable. General partnership interests are transferable unless the partnership agreement provides otherwise. The membership interest in a limited liability company is transferable unless restricted by the articles of organization or the operating agreement. The sale of a corporate business may be through the sale of shares by the shareholder or the sale of the assets of the corporation. Shares in a corporation are typically freely transferable unless restricted by written agreement or by law.