SOLE PROPRIETORSHIP

What is Sole Proprietorship?

A sole proprietor is a self-employed individual who operates a trade or business and reaps all of the profits, but also bears personally all taxes, debts, liabilities, and losses.

What are some of the advantages and disadvantages of Sole Proprietorship?

A sole proprietorship has the advantages of utter freedom and total control, and no need to share profits. However, by the same token there is no one with whom to share the burden of expenses, business loans, and any business losses. If someone sues a sole proprietor for damages alleged to have been caused by the business, the sole proprietor’s personal assets will be available to that person, as well as to any other creditor of the business. This open liability is far and away a sole proprietorship’s greatest disadvantage.

LIMITED PARTNERSHIP 

What is a Limited Partnership? 

A limited partnership is an organization or association of two or more participants who carry on a trade or business together, and allocate the ownership and profit/loss aspects according to their contractual terms. This partnership is a separate entity for tax filing purposes, but not for tax paying. Rather it is a type of conduit through which income, losses, credits, and certain deductions pass to the partners’ individual tax returns instead. Limited partnerships are managed by general partners who have no liability protection.  The limited partners lack management authority, but do have liability protection in most instances.

How does a Limited Partnership differ from a General Partnership? 

A limited partnership is different from a general partnership in that it requires a partnership agreement. Some information about the business and the partners must be filed with the appropriate state agency.

GENERAL PARTNERSHIP 

What is a General Partnership? 

A general partnership must have two or more persons engaged in a business for profit. The business is not a separately taxed entity; rather, it is a conduit where the profit or loss flows through to the partners individually. The partners report their share of the partnership profit or loss on their individual income tax returns. All partners enter into partnership by either oral or written agreement that must cover all terms of the parties’ business relationship.

Partners are jointly and severally liable for all legal and financial obligations of the partnership and for all wrongful acts of any partner acting in the ordinary course of partnership business.

What are some advantages and disadvantages  of a General Partnership?

A general partnership has few advantages apart from the partners’ having control of the business; its chief disadvantage is the lack of liability protection for the partners.

CORPORATION

What is a Corporation? 

A corporation is a separate legal entity formed through a state agency using articles of incorporation. It is authorized to perform virtually all of the business activities an individual can, including such things as filing and paying taxes, signing contracts, and making loans. Ownership is acquired  through the issuance of stock or securities. It is owned by shareholders, governed by a board of directors, and operated by officers. There are two main types: Regular (“C”), where the corporation is taxed itself, or Subchapter S (“S”), where the corporation isn’t separately taxed, but rather all profits and losses flow through to the personal tax returns of the owners.

What are some of the advantages and disadvantages of a Corporation?

A corporation has many advantages.  It is a separate and distinct legal thing with its own assets.  Those assets alone are available to satisfy business expenses, debts, and losses.  The personal assets of the owners are protected, which is very important.  Disadvantages include having to file annual reports with the state, holding periodic meetings of the shareholders and directors, and making sure all business is conducted in the corporate name—none of which are terribly burdensome.

LIMITED LIABILITY COMPANY (LLC)

What is a Limited Liability Company (LLC)? 

A Limited Liability Company is a particular form of business that, like a corporation, must be registered with the state and provides liability protection for the owners of the company, while allowing them to enjoy the other benefits and advantages of a corporation. A Limited Liability Company must abide by some, but not all, of the corporate formalities that a C Corporation must abide by. For example, an LLC can hold fewer meetings and have less formal record keeping than a C Corporation. LLC’s are usually treated as a form of partnership for tax purposes; your tax advisor should be consulted.

Many Northern Colorado business people use LLC’s because they are so simple to form and to administer and because the liability protection they afford is so advantageous. Before attempting to start a limited liability company, or any other business form other than a sole proprietorship, it is wise to consult with an experienced attorney such as Mr. Zier who knows the particular business laws in your state; he can assist you in observing any organizational requirements and operational formalities to ensure that your company is legally formed and properly managed.