“It’s the Law” – Entrepreneurship 101: Owning Your Own Business

Have you ever thought about starting your own business? It may seem difficult, but the process is actually pretty easy. The toughest decision you have to make is what type of business entity you want to form. Here are the main types of business entities: sole proprietorships, partnerships, corporations, and limited liability companies. Let’s discuss how to create each entity and the advantages and disadvantages.

A sole proprietorship is a business entity owned by one person. The owner is not required to create a sole proprietorship with a state agency. It is the easiest entity to form because it only requires a business license. The owner is not required to get a separate tax identification number for the business. The owner makes all of the decisions regarding the business, and reports the profits and losses on his/her personal income tax return. With a sole proprietorship, the owner is personally liable for lawsuits filed against the business.

A partnership is a business entity owned by two or more people i.e. partners, for a profit. Typically, a partnership is created with the state agency governing businesses. There are two types of partnerships: general partnerships and limited partnerships. With a general partnership, each partner is responsible for contributing money, property, and/or services. The partners also share in the profits and losses pursuant to a partnership agreement. In a general partnership, each partner is personally liable for lawsuits filed against the business.

With a limited partnership, there must be at least one general partner and at least one limited partner. All partners in a limited partnership are typically responsible for contributing money, property, and/or services to the business. The partners also share in the profits and losses pursuant to a partnership agreement. With both types of partnerships, the partners will report the profits and losses on his/her personal income tax return. However, in a limited partnership, the general partner is the only partner personally liable for lawsuits filed against the business.

A corporation is a business entity managed by a board of directors. The board of directors elects officers to manage the daily operations of the corporation. A corporation can only be created with the state agency governing businesses. There are stock corporations and nonstock corporations in most states. With a stock corporation, individuals can purchase stock in the corporation; these individuals are called shareholders and they ultimately own the corporation. A nonstock corporation is typically created not-for-profit or for some charitable purpose. Both types of corporations require an annual meeting, and a separate tax return reporting the profits and losses must be filed. The shareholders, directors, and officers are protected from personal liability regarding lawsuits filed against the business.

A limited liability company (LLC) is a business entity owned by its member(s). An LLC can only be created with the state agency governing businesses. An LLC is managed by its members (member-managed) or managers (managers-managed).

Pursuant to an operating agreement, the members or managers share in the profits and losses of the business. The members or managers are not personally liable for lawsuits filed against the business. An LLC is not required to hold annual meetings. The profits and losses must be reported on the personal income tax return for the members or managers.
So, which type of entity are you going to form?

Stephanie J. Pough is an attorney with the law firm of Eric O. Moody and Associates, P.C. which has offices in Portsmouth and Chesapeake, Virginia. The firm broadcasts “IT’S THE LAW,” a weekly legal question and answer talk show on Hampton University’s radio station, WHOV 88.1 FM. The firm’s website is WWW.EOMOODYLAW.COM.

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