Business Entity Formation Overview
There are multiple types of entities and partnerships. When choosing a business structure, find the one that will work for you and your partners, and the vision for the company. Other considerations include management plans, taxes, transferability of ownership interests, and liability. Be sure to consult with an attorney and tax specialist when choosing a type of business entity.
In general, there are six types of business structures:
1. Sole Proprietorship
- This is a simple and informal business structure. This typically allows an individual to engage in business transactions and other activities under a different name other than the individual’s assumed name or surname.
- There is no filing requirement to engage in business as a sole proprietorship, but we recommend filing an Assumed Name Certificate with the county clerk in the county where the business is transacted.
- The benefit of operating as a sole proprietorship is that there is flexibility and no formal filing legal requirements. However, this holds the individual personally liable for all debts and other obligations.
2. General Partnership
- A general partnership, like a sole proprietorship, is an informal business structure that does not require a filing with the state. A general partnership consists of two or more individuals carrying on a business for profit.
- Similar to a sole proprietorship, it is recommended that a general partnership files an Assumed Name Certificate with the county clerk in the county where a business premise is maintained.
- Operating as a general partnership is a cheaper option because there are no formal filing requirements or legal fees. Partners have full agency authority to bind one another to transactions under the partnership. Partners are jointly and severally liable for all debts and obligations.
- A corporation is a legal entity that is owned by shareholders and managed by a board of directors. Characteristics of a corporation include limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests.
- Typically, when incorporating a company, you pay legal fees and fill out a form on the Secretary of State’s website that you wish to incorporate. Usually, there are different types of forms depending on if the corporation is considered a for-profit, nonprofit, or professional corporation.
4. Limited Liability Company (LLC)
- An LLC is a legal entity that has characteristics of both a corporation and a partnership and is owned by members. The most significant feature of an LLC is that the liability of the members is limited to their investment.
- To form an LLC, you fill out a Formation for a Limited Liability Company form and file it online through the Secretary of State’s website and pay the necessary legal fees. There might be a different form to fill out if the company is a Professional Limited Liability Company.
- An LLC is an entity type that offers multiple benefits, including flexible management, limited liability, and flow-through tax status, meaning the members of an LLC are not taxed as a separate business enterprise, but taxes are filed through the individuals’ taxes.
5. Limited Partnership (LP)
- Like a general partnership, a limited partnership consists of two or more individuals carrying out a business for profit. The difference between a general partnership and a limited partnership is that at least one of the partners is a limited partner, who is not liable for the obligations of the partnership.
- To form an LP, you can fill out a Formation for a Limited Partnership form and file it online through the Secretary of State’s website and pay the necessary legal fees.
- There is a benefit for partners involved in an LP because limited partners are not personally liable for the debts of the business. However, due to the limited involvement, limited partners do not have agency authority to enter into transactions on behalf of the business.
6. Limited Liability Partnership (LLP)
- An LLP is similar to a limited partnership in that it is a partnership between two or more individuals who might be a general partner or limited partner. LLP status limits the liability of all partners whether they are limited or general partners.
- To form an LLP, you can fill out Limited Liability Partnership Application, file it online through the Secretary of State’s website, and pay the necessary legal fees.
- In an LLP, general partners are also subject to limited liability, like limited partners.