Bob has a sole proprietorship, John has an LLC. A group of business men have a general partnership and the Jones family has a limited partnership. What are all of these entities? Following are brief basic definitions that can be helpful in deciding what entity to create as part of your business plan.
SOLE PROPRIETORSHIP. This is a business owned by an individual and created without formal filing requirements.
REGULAR C CORPORATION. This is created by filing articles of Incorporation with the State of Ohio. Ownership is evidenced by stock certificates. Fifty-one percent ownership controls the decisions of the corporation.
S CORPORATION. This is a federal tax election that allows the income to pass through to the shareholders each year and avoid double taxation.
PROFESSIONAL CORPORATION. As the name indicates, this corporation is limited to shareholders who are licensed to practice in certain professions such as lawyers or doctors. It allows for the deduction of various employee benefits and takes advantage of pension and insurance plans. Only a limited group can utilize this entity and greatly limits the beneficial use in estate planning.
GENERAL PARTNERSHIP. This is a venture for profit between two or more people. Each is liable for debts of the partnership. It allows two or more people to hold property together. It does not have all of the regulations of a corporation.
LIMITED PARTNERSHIPS. This is a partnership with general and limited partners. The general partners control and are liable for the business operations. The limited partners contribute money or assets but have no say in the operations and have no or very limited voting rights.
FAMILY LIMITED PARTNERSHIPS. This has the same structure but the parties are normally related. It is used to control a family business or asset. It allows a few to run the business while allowing profits to flow to other family members who are not actively involved in the business.
LIMITED LIABILITY COMPANY (LLC). This is hybrid business entity that possesses attributes of a corporation and the flexibility of a partnership. Owners are members rather than shareholders. Everyone has limited liability status whether they are active or inactive in the day to day activities. Their liability only flows to the assets owned by the LLC and their personal assets are insulated. Income is passed through to the members without double taxation. The required paperwork of a corporation is not necessary with a LLC. It has income tax benefits not available to the corporation. It also allows for discounting of the value of a member’s ownership on death. It is the new vehicle in the entity world and the desired entity for business and estate planning purposes.
The decision as to what entity to use needs to be discussed with a qualified accountant and attorney after knowing your goals and objectives.