There are several types of business entities that have quite different characteristics. All of these entity types other than the general partnership are created by state laws, so their traits may vary a bit state by state. The descriptions here are typical but you should always confirm any local variations with your own legal counsel.
General Partnership
The general partnership is the simplest and oldest type of business arrangement. In fact, it’s the only business arrangement that you can form by accident. In most states, a general partnership exists when two or more people agree to conduct a business and share the profits among themselves. Profits from a general partnership flow through to its partners, who own the partnership’s property jointly. General partnerships are generally disfavored today because all partners are fully liable for all partnership business debts.
Limited Partnership
The limited partnership is a step up from the general partnership. Unlike a general partnership, a limited partnership cannot be formed accidentally. A limited partnership requires at least two people—a general partner (commonly referred to as a GP) and a limited partner (commonly referred to as an LP). Formation requires that the GP file a certificate of limited partnership with the state where the partnership is formed. Typically, the limited partners are passive investors, while the general partner(s) are responsible for management of the limited partnership’s business.
Corporation
The corporation is a formal legal entity with a long history. Formation of a corporation originally required a grant of government charter with a specific corporate purpose. Today, filing of a corporation is a relatively easy process. A person, known as the incorporator, must file articles of incorporation with the state where the corporation is to be formed.
A corporation is owned by its stockholders or shareholders, who hold shares of stock in the corporation. The stockholders elect a board of directors to handle major corporate decisions. The board of directors will usually appoint officers (CEO, CFO, and so forth) to run the business day-to-day. In some small corporations, the same individuals may be shareholders, directors, and officers.
Limited Liability Company
In the late 1970s, states began enacting laws that permitted businesses to organize as limited liability companies, or LLCs. An LLC is formed by filing articles of organization with the state where the LLC is being formed. The articles include some very basic information about the company itself, such as a name, mailing address, and registered agent. The primary trait of these entities is flexibility. An LLC is governed by its operating agreement, which can set up the company and its ownership and management in almost any form the owners want to agree on. For this reason the LLC has become extremely popular, particularly for small businesses.
If you have questions about choosing a business entity, our team is ready to assist.
