One of the concerns of every business owner is making sure that the business is appropriately organized.  A business may be operated as a:

Sole Proprietorship


Limited Partnership

Limited Liability Partnership


Limited Liability Company

The type of entity that is chosen will affect not only how revenue is treated from a taxation standpoint but also whether you are personally liable for the debts and obligations of the business.

Let us help you set up the business entity that is right for your business.  The following is a brief description of the different forms of business organization.

Sole Proprietorship

What is a sole proprietorship?

A sole proprietorship is a business entity in which one person, called the "proprietor," owns all of the assets of the business.


How much liability exposure do I have as a sole proprietor?

Because a sole proprietorship is not a separate legal entity, the proprietor is personally responsible for all business debts and legal claims against the business.


Can I protect myself from this liability exposure?

Yes. One method of protection is to buy sufficient liability insurance coverage for your business.  This will help protect your personal assets from claims, provided that the claims do not exceed the coverage limits of the insurance policy.

Another method is to write strong, enforceable contracts -- and be sure to keep your promises.


Are there drawbacks to relying solely on liability insurance coverage?

Yes. First, all liability insurance policies have per-claim limits.  The cost of the policy will be affected by the amount of coverage you select as well as the type of products or services you provide.  If claims are made against your business that are in excess of the insurance coverage, you, as the sole proprietor, will then be liable for the difference.

Second, insurance covers only tort claims for negligence -- accidents, not intentional acts. Insurance usually will not cover a loss for a claim based on breach of contract or arising from an employee or landlord dispute.


How is the sole proprietorship taxed?

All income from the business is directly taxable to the proprietor.


What is a partnership?

A partnership, also known as a general partnership, is an association of two or more individuals or business entities, called partners, who own and operate a business together.


How much liability exposure do I have as a partner?

Like a sole proprietorship, a partnership is not a separate legal entity.  Therefore, all of the partners are personally responsible for all debts and legal claims against the partnership.  You can even be held liable for obligations created by your partner without your permission.


Is my liability limited to only my "share" of the partnership?

No. If a claim is made against the partnership, you are personally responsible for the entire claim.  If your other partners do not have any personal assets and you do, then your assets will be available to satisfy the entire claim.  Your remedy is only the right to contribution from the other partners.  This is little comfort if they have no assets.


Can I protect myself from this liability exposure?

Yes. Like the sole proprietorship, liability insurance can be purchased by the partnership.  The drawbacks of liability insurance are the same as those explained under the sole proprietorship heading.


How is the partnership taxed?

All income from the business is directly taxable to the partners.  This is sometimes called "pass-through" taxation.

Limited Partnership

What is a limited partnership?

A limited partnership is a special type of partnership which has at least one general partner and at least one limited partner.


What is the difference between the general partner and the limited partner?

General partners are responsible for all debts and legal claims against the partnership just like in a general partnership.  Limited partners, however, are only responsible to the partnership up to the amount they invested in the partnership.  This provides a liability shield to the limited partner.  Claimants and creditors of the limited partnership cannot reach through to the personal assets of the limited partner.  They can reach the personal assets of the general partner.  For that reason, some limited partnerships will have a corporation act as the general partner.


If I am a limited partner, how does that affect my relationship with the business?

In exchange for limited liability, limited partners trade off their right to participate in the management of the partnership business. If they participate in the management contrary to their limited partner status, then, in an action brought by a third party against the limited partnership, the courts will "re-label" you as a general partner with all the personal liability that attaches to general partners.


How is the limited partnership taxed?

All income from the business is directly taxable to the partners.

Limited Liability Partnership

What is a limited liability partnership?

A limited liability partnership (LLP) is a special type of partnership which allows the members of the LLP to take an active role in the business of the LLP without exposing them to personal liability for others’ acts, except to the extent of their investment in the LLP.


What is a corporation?

A corporation is a separate legal entity that can own property, transact business and become involved in lawsuits.


Who are the owners of a corporation?

The owners of the corporation are called shareholders or stockholders.


Do shareholders have any personal liability for debts and claims against the corporation?

Shareholders are not personally responsible for any debts or legal claims against the corporation; only the corporation itself is responsible. This is known as the "liability shield."  However, if this “corporate veil” is pierced (which may result if, for example, statutory formalities are ignored, the corporation is under-capitalized or funds are co-mingled), shareholders may find themselves without this liability shield.


How is the corporation taxed?

That depends on whether it is a C or an S corporation. A C corporation can be taxed twice on its profits.  First, the business pays the corporate income tax.  Then, the stockholders pay dividends tax on the same profits when they are distributed.

An S corporation pays no tax at the entity level.  Designed for small business, the S corporation passes all its profits and losses directly through to the stockholders for taxation.  Electing S corporation status requires an affirmative filing with the IRS.  S corporation status can provide many tax benefits for a small business, but significant restrictions apply.  Many small businesses are better off being C corporations.  Your accountant should participate in the decision which is best for your business.

Limited Liability Company

What is a limited liability company?

A limited liability company (LLC) combines features from all of the previous business forms.  An LLC, like a corporation, is a separate legal entity and the owners, called members, are not personally responsible for any debts or legal claims against the LLC.


How is the limited liability company taxed?

Unless otherwise elected, the LLC is taxed like a partnership; that is, the income of the LLC is directly taxable to its members.  There is no tax at the entity level.