Business Structure

• Author: Boyd Childress, Wendy Mason
• Pages: 61-63

Page 61

When forming a new company, one of the first critical decisions is the formal structure that business will take. Issues such as liability, ownership, operating strategy, and taxation are all impacted by the formal structure of the business. Four different business structures are discussed below: partnership, corporation, Subchapter S, and limited liability corporation (LLC).

PARTNERSHIPS

A partnership is a business association where two or more individuals (or partners) share equally in profits and losses. As is the case with a sole proprietorship, partners have full legal responsibility for the business (including debts against the business). Persons entering into this type of business need a partnership agreement detailing how much each partner owns of the business, how much capital each person will contribute, and the percentage of profits to which they are entitled; how company decisions will be made; if the company is open to new/additional partners, and how they can join; and in what cases and how the company would be dissolved.

In a general partnership, all partners are liable for actions made on the company's behalf, including decisions make and actions taken by other partners. Profits (and loss) are shared by all partners, as are company assets and authority.

A limited partnership is a similar business arrangement with one significant difference. In a limited partnership, one or more partners are not involved in the management of the business and are not personally liable for the partnership's obligations. The extent to which the limited partner is liable is thus "limited" to his or her capital investment in the partnership.

In a limited partnership agreement, several conditions have to be met, the most important of which is that a limited partner or partners have no control or management over the daily operations of the organization. There must be at least two partners and one or more of these general partners manage the business and are liable for firm debts and financial responsibilities. If a limited partner becomes involved in the operation of the partnership, he or she stands to lose protection against liability. In addition, a limited partnership agreement, certificate, or registration has to be filed, usually with the secretary of state, but this varies by state. Such an agreement generally includes the...