“A business entity is an organization established as a separate existence for the purposes of taxes (BusinessDictionary. com, n. d. ). ” Some of the most common known business entities are; sole proprietorships, general partnerships, limited partnerships, corporations, and limited liability companies. Each business entity has its advantages and disadvantages. With each business entity, there are different types of personal liability exposure as an owner (see Table 1). I currently own five different businesses and each one of them is a different type of business entity.
?“Tinker’s Home Security Service (sole proprietorship) ?Tinker & Tailor’s Home Security Service (general partnership) ?Tinker & Tailor’s Home Security Service (limited partnership) ?Tinker & Tailor’s Home Security Service, LLC (limited liability company) ?Tinker & Tailor’s Home Security Service, Inc. (corporation)” Table #1 Business Entities and Liabilities Sole Proprietorship “The sole proprietor’s assets, personal and business-related, are subject to a lawsuit (Seaquist & Coulter, 2012). ” General Partnership “All the partner’s assets (personal and business) are subject to a lawsuit (Seaquist & Coulter, 2012).
” Limited Partnership “Two or more partners (general and limited) one general partner has unlimited liability of the business, the limited only to the limit of their capital investment (Seaquist & Coulter, 2012). ” Limited Liability Company “Liability is limited to one’s investment and personal assets are usually exempt, members are not fully shielded (SBA. gov, n. d. ). ” Corporation “Liability is limited to one’s investment (i. e. , in shares of stock) (Seaquist & Coulter, 2012). ” Note: Adapted from “Sole Proprietorships and Partnerships,” by Seaquist & Coulter, 2012, Business Law for.
Managers, Chapter 28. Copyright 2012 by Bridgepoint Education Inc. Business Entities Defined 2 BUSINESS ENTITIES & LIABILITIES Business 3 A sole proprietorship does not exist as entity that is separate from its owner. All it really is is the right to use a name that I was not born with. This means that a sole proprietorship is just me, and if I am liable for any debts or damages, my personal assets are at stake (usa- corporate. com, n. d. ). A general partnership makes each partner fully liable for all partnership-related debts and obligations of every other partner.
This means that if my partner did something wrong I can be required to satisfy the obligation, regardless of how much (or little) I invested in the partnership (usa-corporate. com, n. d. ). “A limited partnership is a special type of partnership that comprises both general and limited partners. There must be at least one or more general partners who manage the business and have unlimited liability for partnership debts. The limited partner’s liability is limited to their investment in the business (Seaquist & Coulter, 2012). ”
A limited liability company is a business formed by permission of the secretary of state’s office; usually professionals such as doctors and lawyers. The Members of an LLC are protected from personal liability for business decisions or actions of the LLC to the extent of their investment in the LLC. This means that if the LLC incurs debt or issued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability members are not necessarily shielded from wrongful acts, including those of their employees (SBA. gov, n. d. ).
“A corporation is a business entity that is separate and distinct from its owners, the shareholders. ” The shareholders of a corporation are only liable for the capital they have 3 BUSINESS ENTITIES & LIABILITIES Business 4 committed to invest in the company. If they have not paid in all their share capital and the corporation goes bankrupt, they may have to pay up the unpaid portion (usa-corporate. com, n. d. ). Limit Business Entity Exposure to Liability There are many steps that can be taken by a business entity to protect itself from exposure to liability; some business entities have more options than others do.
Sole Proprietorship A sole proprietorship has an extremely high potential for liability exposure as there is only one owner and they are not separate from the business entity. There are not many options for a sole proprietor; it would be wise not to choose this type of entity at all considering it unlimited liability side affect (Larson, 2004). “Sole Proprietors must rely on other asset protection strategies, including post-judgment and bankruptcy asset exemptions, asset protection trusts, use of independent contractors, insurance, etc (BizFilings. com, 2012). ” General (Simple) Partnership.
A general (simple) partnership has the same liability exposure as a sole proprietorship with the addition to unlimited personal liability for the actions of the co-owners. “Owners in a general partnership will also rely on other asset protection strategies, including post-judgment and bankruptcy asset exemptions, asset protection trusts, use of independent contractors, insurance, etc (BizFilings. com, 2012). ” Best bet is to make sure that you carry a whole lot of insurance if you are responsible for your decisions and the decisions of your co-owners. Limited Partnership (LP) 4.
BUSINESS ENTITIES & LIABILITIES Business 5 “A limited partnership (LP) has two types of partners: general and limited. ” The limited partner’s liability is limited to that of their original investment. The general partner has unlimited liability just like that of a sole proprietor (BizFilings. com, 2012). “The limited partner personal liability is nil, while the general partner should consider other asset protection strategies, including post-judgment and bankruptcy asset exemptions, asset protection trusts, use of independent contractors, insurance, etc (BizFilings. com, 2012). ”
Limited Liability Company (LLC) An LLC can be formed as a single owner LLC or it can be a multiple partner LLC and it provides protection of the owner’s assets in the event of debt, lawsuit, etc. However, to insure that the LLC protection works for the owner/owners there are a few things the LLC can do to insure the protection. Personally guaranteeing a loan makes you responsible for the debt in the event that the LLC cannot pay it. Misuse of funds or commingling assets by any member makes that member or member’s personally responsible and wide open for liability.
LLC member fraud and poor maintenance of LLC records will also open the owners up to a liability (The LLC Company , n. d. ). Corporation A corporation much like an LLC protects the personal liability of its owners. However, if corporate formalities are not followed then limited liability protection is at danger. Courts can rule that a corporation does not really exist and that its owners should not be shielded from personal liability for their acts in the event that they fail to follow the following corporate formalities. Adequately investing money in (“capitalizing”) the corporation, formally issuing 5.
BUSINESS ENTITIES & LIABILITIES Business 6 stock to the initial shareholders, regularly holding meeting of directors and shareholders, and keeping business records and transactions separate from those of the owners (Beth Laurence, n. d. ). Potential Business Entity From 2005-2007 I along with my husband owned a small retail shop in our local community. I would refer to it as a sole proprietorship, and it was our joint marital money that funded to the businesses start up.
This was a low personal liability exposure business so the sole proprietorship worked well for us. If a customer was unhappy with a purchase, we simply refunded the customers money or allowed them to make an exchange. Management was simple as my husband had a full time job I was left to manage all the functions of the business. Obtaining our state license was simple and the business taxes were not that difficult, as we did not do a high volume of sales until the summer months (tourist season). The business had its own bank account to accept in coming money from the stores credit card machine and nightly deposits, and the funds in this account were strictly used for the bills of the business, merchandise, and advertising.
Starting up the business was as simple as opening the bank account, obtaining the state license, renting the building, and ordering the merchandise. If (and that is a big IF) I ever decided to open a business again I would take the same route unless it was a business with higher personally liability exposure. 6 BUSINESS ENTITIES & LIABILITIES Business 7 References Beth Laurence, J. (n. d. ). Corporation Basics. Retrieved May 19, 2014, from nolo. com: http://www. nolo. com/legal-encyclopedia/corporation-basics-29867. html BizFilings. com. (2012, May 24). Sole Proprietorships and General Partnerships Are Risky.
Business Forms. Retrieved May 18, 2014, from bizfilings. com: http://www. bizfilings. com/toolkit/sbg/run-a-business/assets/sole-proprietorships-general- partnerships-risky. aspx 7 BUSINESS ENTITIES & LIABILITIES Business 8 BusinessDictionary. com. (n. d. ). Business Entity. Retrieved May 17, 2014, from BusinessDictionary. com: http://www. businessdictionary. com/definition/business- entity. html Larson, A. (2004, August). The Sole Proprietorship. Retrieved May 18, 2014, from Expertlaw. com: http://www. expertlaw. com/library/business/sole_proprietorship. html SBA. gov. (n. d. ).
Limited Liability Company. Retrieved May 18, 2014, from SBA. gov: http://www. sba. gov/content/limited-liability-company-llc Seaquist, G. , & Coulter, K. (2012). Business Law for Managers. San Diego: Bridgepoint Education, Inc. The LLC Company . (n. d. ). When LLC Owners Can Be Liable. Retrieved May 19, 2014, from the-llc-company. com: http://tm/limited-liability/llc-owners-liable/ usa-corporate. com. (n. d. ). Most common types of business entities. Retrieved May 18, 2014, from usa-corporate. com: https://www. usa-corporate. com/setting-up-a-us-company-as-a-non- us-resident/types-of-business-entities/ 8.