What kind of business is right for you?
Selecting the best entity for a given venture involves a number of considerations including (1) taxation, (2) owner liability, (3) governance, (4) capital structure, and (5) potential exit strategies, to name a few.
Below is a primer on some of the various entities that are available for Washington businesses. I have highlighted some of the main features of the primary entity options. You can find a more robust analysis of each entity by clicking on the hyper linked terms. And you can find a comparison chart here. The information provided on this website is general information for reference only. It is not legal advice, and you should consult your lawyer or attorney before selecting an entity for your business. This information is provided so that you will be able to have a better understanding of the general issues involved in selecting an entity, and so that you will be able to have a better discussion of these issues with your lawyer or attorney.
The Sole Prop
A sole proprietorship is a business owned and controlled by a single individual or a married couple. A sole proprietorship is easy to form and operate, but sole proprietors are personally liable for debts and claims against their businesses. Sole proprietors must report their business income and expenses, along with other items, on their individual tax returns.
The General Partnership
A general partnership is an association of two or more individuals to carry on as co-owners a business for a profit. No formal paperwork is required to initiate a general partnership. In fact, general partnerships are sometimes formed accidentally or without the intent of the general partners. Each partner is an agent of the firm for purposes of its business, and the act of each partner in apparently carrying on the partnership business generally binds the partnership. Each partner has a right to share the profits and losses, and a right to participate in the management of the business. Additionally, each general partner is jointly and severally liable for all debts and obligations of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.
The Limited Partnership(s)
A limited partnership has both general and limited partners. The general partners participate in management and share the profits and losses. General partners are also jointly and severally liable for all debts and obligations of the partnership. Limited partners, however, generally do not participate in management, and are only liable to the extent of their investment in the partnership. Unlike a general partnership, the creation of a limited partnership requires the execution and filing of a certificate of limited partnership with state officials.
A Limited Liability Partnership* is similar to a General Partnership except that normally a partner does not have personal liability for the negligence of another partner. This business structure is used most commonly by professionals such as accountants and lawyers.
The Limited Liability Limited Partnership* a Washington limited partnership may opt to become a limited liability limited partnership by including a statement to that effect in its certificate of limited partnership. Status as a limited liability limited partnership provides general partners with a shield from liability for obligations of the limited liability limited partnership.
A Limited Liability Company (LLC) is an unincorporated entity in which one or more individuals called “members” have limited liability for the enterprise’s debts and claims even if they participate in management. Members of an LLC have great flexibility in structuring the management of their venture through the LLC’s governing document, known as an “operating agreement.”
A corporation is a legal entity formed under state law. Corporations allow for the split of management and ownership – shareholders own the corporation, but senior management controls the day to day operations. Neither managers nor shareholders are generally personally liable for the debts of a corporation. Corporations are generally more burdensome to operate, and are usually taxed quite differently, and sometimes more extensively, than partnerships. However, the corporate structure is often ideal for raising capital, and the corporate form has long been the most commonly used legal form for operating virtually all publicly held businesses. Variations of corporations include S Corporations and non-profit corporations. S corporations are subject to a number of restrictions, but are taxed like partnerships. A nonprofit corporation is a legal entity typically run to further some public interest, rather than strictly for profit.