In the first article of our series regarding choosing an entity type, we discussed the pros and cons of a sole proprietorship. In this article, we will discuss three more candidates on the business structure ballot: general partnerships, limited liability companies (LLCs), and limited liability partnerships (LLPs).
General partnerships are separate legal entities formed by two or more individuals. All of the partners share the company’s profits and losses according to their ownership percentages.
General Partnership Advantages
- Simplicity: General partnerships are relatively easy to form. Partners can create an entity without filing any legal documents. In fact, a partnership could be as simple as a verbal agreement (although written partnership agreements are encouraged to minimize any misunderstandings). Partnerships can be converted to another type of entity if circumstances surrounding the owners change in the future.
- Profits are Taxed Once: With pass-through taxation, general partnerships’ earnings are taxed only at the individual level. The business pays no federal income tax.
General Partnership Disadvantages
- Personal Responsibility: Owners accept full responsibility for owing money to third-parties. Therefore, they are personally liable to creditors for those obligations. If a partner cannot contribute, then the remaining partners can be held responsible.
- Limited Life Span: A partnership may end if a partner either dies or transfers his/her interest in the company to someone else. This circumstance can make it difficult to obtain loans or establish other business relationships.
LLCs and LLPs
The next two candidates for entity selection are LLCs and LLPs. Both of these can have one or more owners. Although they share similarities with general partnerships, these entities are separated by their limited liabilities.
LLC and LLP Advantages
- Profits are Taxed Once: As with general partnerships, LLC and LLP members share in the earnings and losses of the business, and those earnings are taxed only at the individual level.
- Limited Liability: In an LLC or LLP, members have limited liability and cannot be held personally responsible for the debts or obligations of the entity. Members are also protected from negligent acts, such as malpractice, that other partners commit. They can fully manage the business without forfeiting their limited liability.
- Unlimited Members: The unlimited number of members allows the business to raise a significant amount of capital. These companies also have formalized structures, which gives them better luck with obtaining loans and other types of financing.
LLC and LLP Disadvantages
- Amount of Required Documentation: Many states require LLCs and LLPs to submit multiple legal documents, which can make setting up the business (or changing its structure) more cumbersome.
- Insurance Requirement: LLC and LLPs are also required to carry a minimum level of liability insurance for the partners to benefit from liability protection.
CRI Can Help You Cast the Right Entity Selection Vote.
If you are an entrepreneur in the midst of selecting your entity, then it is important for you to be a well-informed voter. Regardless of your industry, CRI’s advisors can help you take into account any industry-specific nuances and cast the right vote for your up-and-coming business. Contact us today.