What is a sole proprietorship?
A sole proprietorship exists as one of the common business organization types. In this arrangement, a single individual conducts business on their own behalf. Not recognized as a distinct legal entity, a sole proprietorship lacks independent existence apart from its owner.
This type of business organization is the simplest and most cost-effective to initiate, requiring the proprietor to merely commence operations. Unlike entities such as LLCs or corporations, a sole proprietorship is not required to have formal registration with the state’s business organization filing office prior to starting operations.
However, it is important to note that specific licenses or permits may be mandated by local or state regulations for certain types of businesses. For instance, the owner of a restaurant may require specialized permits like a liquor license to operate. Professions such as law, plumbing, and accounting may require state-issued licenses to provide services. Should the sole proprietorship engage in activities subject to local and state sales taxes, it will need to get a sales tax certificate. In cases where the business hires personnel, obtaining a Federal Employer Identification Number is essential.
With this common type of business organization, an exception to the basic filing requirement arises when the sole proprietor operates under an alias other than their legal name. For instance, if John Jackson operates under the name Sunshine Advisors, he needs to submit a statement indicating that Sunshine Advisors is indeed John Jackson conducting business under an alternate name. This designation is referred to by other terms in various states, such as assumed name, trade name, or fictitious name. The specifics of when and how these names need to be submitted are dictated by state law.
Aside from the common type of business organization’s straightforward setup, a sole proprietorship is also straightforward to manage. With a single owner, decisions rest solely in their hands, necessitating no formal votes or meetings. Additionally, one of the key advantages is that all losses and profits are attributed to the entrepreneur and are included in their personal income tax return. The company is not subject to taxation itself.
The primary drawback of this type of business organization lies in the personal liability of the owner for the business’s obligations. In the event that the assets held by the business (such as tools, cash, inventory, real estate, etc.) are inadequate to cover its debts, the personal assets of the proprietor may be confiscated to fulfill those responsibilities. When considering entrepreneurship, it’s essential to research different types of businesses to determine which one aligns best with your skills and interests.
What is a general partnership?
When multiple individuals agree to engage in business together, they form a partnership, another common business organization. Operating in the form of a partnership is a recognized common-law right, meaning that no particular statute is required to establish one. However, every states does have statutes that address partnerships, primarily containing default provisions applicable only when the owners have not dealt with these matters in the partnership agreement. These statutes typically specify that if there is no contrary provision in the partnership agreement, all partners have the same authority in managing the partnership, and they equally share in losses, profits, and income distributions. With this common business organization, it is also stipulated that every partner acts as the partnership’s agent and can legally commit the other partners in relation to the company. The modern marketplace offers an array of business models, and understanding the various types of businesses can help you make informed decisions about your career path.
A general partnership can be informally established through verbal agreement or through a formal partnership agreement in writing. Nonetheless, with this common business organization, it is generally recommended to have a partnership agreement in writing. This document typically outlines:
- The partners’ addresses and names
- Each partner’s respective rights regarding profit-sharing and management
- The business nature of the partnership
- The partnership’s duration
- Criteria for withdrawing and admitting partners
- Provisions governing the partnership’s dissolution, along with any other terms the partners deem necessary for guiding the relationship and the business’s operations.
As one of the common types of business organizations, a general partnership possesses a lot of a sole proprietorship’s favorable aspects. It is straightforward to set up and manage, and it is not subject to income taxation on the entity level. Instead, it is considered a “pass-through” entity, with losses and profits passing through to the owners. However, akin to a sole proprietorship, a partnership carries the significant drawback of exposing the partners to unlimited personal liability for the business’s debts.
What is a corporation?
A business corporation represents another common business organization, and the most intricate form. Its establishment and internal workings are regulated by state law. A business corporation is an entity formed for profit in accordance with the laws of a specific state. Nonprofit corporations, governed by distinct legal sections, are not covered in this publication. Some types of businesses are service-based, such as consulting firms or healthcare providers, while others focus on manufacturing and production are corporations. While once the most common business organization in the U.S., LLCs are now more frequently established than corporations in most states. Nevertheless, the corporation remains a popular and viable choice for numerous entrepreneurs and is the primary selection for publicly traded businesses.
There exist four primary advantages to operating as a corporation:
- Investors are not personally responsible for the obligations of the corporation.
- The corporation enjoys perpetual existence.
- Capital can be raised through the sale of securities and stocks.
- The corporation has centralized management, allowing investors to avoid involvement in daily operations.
However, there exist three big drawbacks to the corporate form of organization:
- It is very costly to establish.
- It is very complicated to manage.
- It endures “double taxation” – meaning the corporation pays tax on its earned income, and shareholders pay tax on the income when received in the form of distributions and dividends upon the corporation’s liquidation.
What is a limited partnership?
Limited partnerships (LPs) encompass two categories of partners: limited partners and general partners. General partners possess identical authority, rights, and obligations as partners in standard general partnerships. They oversee the relationship, share in losses and profits, and bear unlimited personal liability. On the other hand, limited partners have liabilities restricted to their investment in the venture, akin to shareholders in a corporation. As a fundamental principle, limited partners typically refrain from involvement in the business’ management.
This common type of business organization functions as a pass-through tax entity, meaning it is not subject to federal income taxes.
A limited partnership cannot be established solely through business activities. This common business organization is a legally defined kind of commercial organization, requiring compliance with state statutory prerequisites for formation.
To formalize a limited partnership, it must submit a certificate containing specific information as dictated by its state of establishment. State regulations generally impose limitations on the choice of the partnership’s name, mandate the appointment and retention of a service of process agent within the state, and necessitate filings for any amendments or cancellations of the certificate. Also, state laws allow out-of-state (foreign) limited partnerships to obtain licensure for conducting business after submitting the requisite application.
Recently, several states have introduced provisions for a specialized type of limited partnership known as a limited liability limited partnership, abbreviated as LLLP. The key distinction between a regular limited partnership and an LLLP is that in the latter, owners who otherwise would have unlimited liability assume the same liability as owners in a limited liability partnership.
What is a limited liability company?
A limited liability company, commonly referred to as an LLC, represents another legally defined entity and common business organization. It does not fall into the categories of a partnership or a corporation, but rather operates as a “hybrid” organization, combining certain features of both. Typically, it is established by submitting articles of organization to the appropriate state filing authority. The majority of regulations pertaining to the internal workings of an LLC are outlined in an operating agreement, which is agreed upon by the owners. This agreement bears resemblance to a partnership agreement. In recent times, the LLC has emerged as the most common business organization in the U.S. The legal and regulatory requirements can vary significantly between different types of businesses, so it’s crucial to consult with experts to ensure compliance with relevant laws and regulations.
An LLC can be owned solely by one individual or have multiple owners. The proprietors of an LLC are referred to as members. Like shareholders or limited partners, the owners of an LLC are not held personally liable for the business’ debts based solely on their ownership status. Further, members possess the authority to oversee the company’s operations and affairs, and this does not jeopardize their limited liability status, even if they take on managerial roles. Alternatively, the members may opt to appoint at least one manager to operate the LLC if they prefer not to handle it themselves.
One of the key advantages of a limited liability company is its flow-through taxation structure. Unless it specifically elects otherwise, an LLC is not obligated to pay a separate income tax at the entity level. Instead, its losses, profits, and other tax-related items pass through to its members.
If a limited liability company conducts business in states other than its state of origin, it must seek authorization to operate in those foreign states. The laws governing the internal affairs and member liability of a foreign LLC are typically dictated by the state where it was originally established.
What is a limited liability partnership?
Another common business organization available to entrepreneurs is the limited liability partnership, abbreviated as LLP. An LLP is a specialized type of general partnership. The primary distinction between a limited liability partnership and a standard general partnership lies in the extent of partners’ liability exposure. In LLPs, partners have restricted, rather than unrestricted, liability. In the majority of states, LLP partners are safeguarded from being personally liable for the partnership’s debts and responsibilities. However, in certain states, partners may not be held liable for obligations stemming from the wrongful actions or negligence of fellow partners, but they could still be responsible for other obligations and debts.
To transition from a general partnership to this common type of business organization, a registration form must be submitted to the secretary of state or the appropriate filing authority. Alternatively, in certain states, an LLP can be established without prior existence as a general partnership. If an LLP operates in a state different than its state of formation, it must register as a foreign LLP before conducting business in that state. Additionally, in the majority of states, this common business organization is obligated to submit an annual report.
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Nakase2025-04-22 19:25:532025-04-22 19:28:59Longshoreman Providers: FAQ for Maritime Employers
