Corporate and Business Law > Formation of Business Enterprises

Sole Proprietorship | Partnership | Corporation | Limited Liability Company | Limited Partnership | Limited Liability Partnership

Sole Proprietorship

The sole proprietorship is a business that is conducted by a single individual owner (the "sole proprietor"). Sole proprietors can conduct business under their own name or under a trade name. If a sole proprietor operates under a trade name or fictitious names, the sole proprietor is required to file a form ("trade name certificate") in the city, county, or state where the business is located. A sole proprietorship may have employees and is permitted to carry on most businesses.

Partnership

A partnership is a business enterprise entered into by two or more persons to operate the business with the understanding that each will share in the profits of the enterprise. Partnerships are not required to file any certificates or other organizational documents with local, county, or state authorities; but they usually must file a "trade name certificate". The rights and duties of the partners and partnership may be governed by a partnership agreement.

Corporation

A corporation is legal entity wholly separate and apart from its owners (the shareholders or "stockholders"). Corporations are formed by filing "Articles of Incorporation" with the Secretary of State. Shareholders elect directors, who exercise the rights and power of the corporation and are responsible for the management of the corporation. Directors elect officers such as president, vice-president, treasurer and secretary to carry out the policies of the board and to run the corporation on a day-to-day basis. Corporation's stockholders, directors, and officers are not liable for the debts or other obligations of the corporation excluding those that they have personally guaranteed or result from their own negligence or misconduct. Corporation is not terminated or dissolved upon the death or departure of any shareholder. Shares can be purchased on a national stock exchange such as the New York Exchange, NASDAQ National Market System, or the American Stock Exchange. Bylaws are a separate set of rules governing how a corporation is run. Bylaws are adopted by the shareholders and can later be changed by a vote of the shareholders or the directors.

Professional Corporations: Professional corporations are corporations formed by doctors, lawyers, accountants, engineers, architects, and other professionals to do business in their respective professions. Under some state laws, only licensed professionals can be shareholders and directors of professional corporations. The same rule usually applies to partnerships, limited liability companies, and other entities formed by professionals to practice their professions. In most states, a professional will not be liable for the negligence or misconduct of other professionals working for the corporations, except those directly supervised by such professional. Of course, professionals will be liable for their own negligence or misconduct.

Limited Liability Companies

A Limited Liability Company, or "LLC", is an unincorporated business entity that is similar to both corporations and partnerships. Like a corporation, an LLC shields its members from personal liability for the debts and obligations of the company. Like a partnership, an LLC is typically formed by the filing of a "certificate of formation" or similar certificate with the Secretary of State and the members of LLCs typically enter into an operating agreement that establishes how the LLC is governed. LLCs may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. As compared to a Corporation, an LLC has more flexibility in management as LLC may be managed solely by its members or a management committee or officers. LLC's do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors. LLC's are available in all 50 states and Washington, D.C. An LLC may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC. Because an LLC combines the insulation from personal ability of a corporation with the tax advantages and managerial flexibility of a partnership, it may be the entity of choice for new businesses.

Limited Partnerships

A limited partnership is a partnership in which the duties and obligations of the partners are divided between "general partners" and "limited partners". A "general partner" is a partner who is responsible for managing the partnership and its operations. A "limited partner" is one who is prohibited from taking part in the partnership's management and day-to-day operations. The limited partner is usually not personally liable for the partnership's debts and other obligations. Hence it may be easier to market limited liability partnership interests as an investment.

Limited Liability Partnerships

Limited liability partnerships are partnerships in which the liability of all the partners is limited. Generally the partners in limited liability partnerships are not responsible for the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts, or misconduct by another partners, employee, or agent of the partnership. However, a partner of a limited liability partnership is liable for other partnership debts and obligations as well as for their own negligence, malpractice or wrongful acts, or misconduct and that of any person under their direct supervision and control. Limited liability partnerships are governed like general partnerships and have a similar degree of management flexibility.