The Art of Registering a Business: Picking the Right Method of Registration for Your New Business

by Rayna Gokli November 14 2007, 21:16

I. Introduction

Starting a new business can be a scary venture for a new entrepreneur. Beyond picking a location, hiring personnel and establishing a clientele base, deciding how to register the business can be an important decision with lasting implications. There are five main categories under which a new business owner can register his or her new business: sole proprietorship, general partnership, limited liability partnership, limited liability company or corporation. This article discusses the pros and cons of registering under each of the five categories and the legal implications of each option.

II. Sole Proprietorship: Description, Liability, Tax Benefits

A sole proprietorship is the most common type of business organization. [1] In a sole proprietorship, one person owns and manages the business and there is no separation between the business entity and the individual, meaning for tax purposes the individual must file only one individual tax return. [2] The advantages of having a sole proprietorship can be great because it is low cost and low effort. [3] There are no registration requirements for becoming a sole proprietor. [4] Additionally, a sole proprietor can easily operate in other states without registering the business in those states. [5] The greatest disadvantage to having a sole proprietorship is that the business owner becomes one with the assets of the business- meaning if the business goes bankrupt or has liabilities, they become the owners liabilities, as well. [5]

III. General Partnership: Description, Liability, Tax Benefits

In a general partnership (GP), the individual(s) or corporation designated as the general partner will be held responsible for the debts and actions of the partnership as a whole or any of its members. [6]Additionally, all partners share in the profits and liability. Section 101 of the Uniform Partnership Act defines a partnership as, "an association of two or more persons to carry on as co-owners a business for profit." [7] While registration is not necessary to form a GP, it is best to delineate the terms of the partnership in writing in case conflict arises. [8] For tax purposes, each owner of the GP will be taxed on his or her share of the partnership profits. [9]

IV. Limited Liability Partnership: Description, Liability, Tax Benefits

A limited liability partnership (LLP), on the other hand, is generally reserved for use by specific professions, like accounting and law firms. [10] Professional firms generally prefer the LLP designation because it allows individuals to practice without fear of being held completely liable for malpractice claims in which the individual has no part. [11] Registering as a limited liability partnership protects the owners of the partnership from "the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts, or misconduct by another partner, employee or agent of the partnership." [12] However, a partner will still be liable for any of the aforementioned conduct that a partner commits or that occurs under that partner's direct supervision. [13] In an LLP, any partner can bind the business. [14] Additionally, LLPs are similar to general partnerships in the way they are run. [15] The profits of an LLP pass to the partners, who eventually pay them as an income tax. [16]

V. Limited Liability Company: Legal Description, Liability, Tax Benefits

A limited liability company (LLC) is called so because the owners, also called members, are only subject to limited liability for the debts and actions of the company. [17] While the members will not be liable for the mistakes of the company, they will be held liable for any individual mistakes the member makes. [18] Registering the company as an LLC also has tax benefits. [19] "LLCs are a 'pass through' tax entity, which means company profits are passed through the business and taxed solely on the member's individual tax returns." [20] Additionally, the members of an LLC report all gains, losses, credits and deductions as income on their personal tax returns. [21]

VI. Corporation: Legal Description, Liability, Tax Benefits

Unlike the LLP, LLC and sole proprietorship, a corporation is considered distinct from its shareholders. [22] Since it is considered a separate legal entity, a corporation is considered of unlimited duration. [23] "When a company is incorporated it acquires all of the powers of an individual, an independent existence- separate and distinct from its shareholders, and an unlimited life expectancy." [24] Shareholders can easily transfer shares and no member can be held personally liable for any debts or obligations the corporation incurs. [25] The advantages of incorporation include limited liability, possible tax advantages, specialized management, transferable ownership and a continuous existence. [26] Disadvantages of a corporation include character restrictions, extensive record keeping and close regulation by the government. [27]

VII. Legal Implications

As with any foundational business decision, the legal implications of registering can have a lasting effect on the success of that business. The sole proprietorship is the most popular option for small business owners because it is procedurally the easiest to establish and gives owners the most control. However, the owner is left with full liability if the business fails, which is a risk for many new businesses. The LLP is the best option for professional businesses that may be held liable for the mistakes of employers or the partnership within that business because it insulates individuals from liability. The LLC is also a solid option for business owners seeking to limit liability. While the corporation also limits the liability of corporate shareholders, incorporating a business can be a heavy feat for a small business owner and may not be worth the hassle.

VIII. Conclusion

This article outlines the five basic types of business organizations. Factors to take into account when deciding how to register a business include size of customer base, number of employees, tax benefits and overall purpose of the business. Additionally, It is always wise for new business owners to seek the advice of an attorney before deciding how to register the business because attorneys have the perspective and resources to help an owner make the proper decisions for their business.

[1] Michael A. Muaro, Sole Proprietorship, http://www.sos.state.ia.us/business/sole.html (last visited Nov. 3, 2007).

[2] Id.; Coollawyer, Sole Proprietorship, http://www.coollawyer.com/webfront/bizfilings/sole_proprietorship.php (last visisted Nov. 3, 2007).

[3] Mauro, supra note 1.

[4] Id.

[5] Id.

[6] Internal Revenue Service, Partnerships, http://www.irs.gov/business/small/article/1,,id=98214,00.html (last visited Nov. 13, 2007).

[7] Revised Uniform Partnership Act, 26 U.S.C. § 101 (1997).

[8] Internal Revenue Service, supra note 6.

[9] Id.

[10] Tom Pedreira, Limited Liability Partnership, http://business-law.lawyers.com/business-enterprises/Limited-Liability-Partnership.html (last visited Nov. 3, 2007).

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id. See discussion accompanying notes 6 through 9.

[16] Pedreira, supra note 10.

[17] Internal Revenue Service, United States Departmente of the Treasury, Limited Liability Company, http://www.irs.gov/business/small/article/0,,id=98277,00.html (last visited Nov. 3, 2007).

[18] Small Business PC, Proprietorship vs. Incorporation, http://www.smallbusinessbc.ca/bizstart-prope.php (last visited Nov. 3, 2007).

[19] Internal Revenue Service, supra note 17.

[20] AllBusiness, Limited Liability Company (LLC) Basics, http://www.allbusiness.com/business-planning/business-structures-limited-liability/1289-t.html (last visisted Nov. 12, 2007).

[21] Id.

[22] Small Business PC, supra note 18.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

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