Glossary of Business Entities
A successful business venture usually grows from a simple idea into greater commercial possibility. One of an entrepreneur’s first and most crucial business decisions is to determine what legal form the new enterprise should take. If you are starting a company, a skilled business law attorney can help you weigh the pros and cons of each available business entity, considering the laws of your jurisdiction; your goals; and issues like flexibility, taxation, legal liability, size and potential profitability.
An entrepreneur can choose from a sole proprietorship, partnership, corporation, limited liability company (LLC) or other type of entity, depending on what is available under the law of the applicable state or jurisdiction.
Sole proprietorships are relatively simple operations run by self-employed persons who have not organized their businesses into formal business entities.
Partnerships are formal or informal agreements to work cooperatively and divide the business profits and losses. In general partnerships all the associated parties have joint decision-making responsibility and share in the profits, losses, debts and liabilities. In limited partnerships the limited partners supply capital and share proportionately in income (and perhaps losses proportional to contributions) but do not take active partnership control, which is left to general partners.
Corporations are formally organized business entities of perpetual duration typically governed by state laws and regulations, and usually managed by boards of directors and corporate officers. Shareholders can participate in corporate profits and losses by buying shares of corporate stock. Corporations are considered separate legal entities from their directors, officers and shareholders, who are normally not personally responsible for corporate debts and liabilities.
Limited liability companies, also known as LLCs, offer members restricted personal responsibility for company debts and obligations. LLCs usually exist for a specified number of years. Like corporations, LLCs must file documents with state agencies to establish and maintain their status. LLCs only came into being beginning in the 1970s and function in several ways like partnerships.
Joint ventures are specific business projects carried out by two or more persons. Joint venturers share financing, management, liabilities and profits from limited commercial transactions, as opposed to having ongoing general business relationships. Legally, joint ventures are usually treated similarly to partnerships.
Most states allow operation of all the business types defined above and some states also offer different varieties of these entities. However, each state’s laws, although similar, have their own unique twists and turns. Therefore, a business lawyer experienced in the particular laws of your jurisdiction can advise you on a desirable course of action for your business, depending on your objectives. Of foremost concern, the selection of a business form usually has tax implications, as well as an effect on how the profits are distributed and liabilities attached.
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