withdrawal of partners or the admission of new …

1 Generally speaking, there are three basictypes of legal entities in which business can beconducted: (1) sole proprietorship, (2)partnership, and (3) corporation. Within eachcategory, there are several which form is best for a particularcommercial enterprise depends on a variety ofconsiderations, including the number of owners,acceptable liability of owners, tax treatment,transferability of ownership interests, set-upcosts, and other factors. Sole Proprietorship. This is a form ofbusiness involving one and only one owner.

2 Nospecial legal documents are needed to establish asole proprietorship and really it is not even adistinct legal entity, separate from its owner. Asa result, the owner is liable for all of the debtsand liabilities of the business, but has totalcontrol of the business. If the business is to beconducted under a name, it is necessary to file anassumed name certificate (sometimes referred toas a dba ) in any county in which the business isto be conducted. The business does not file aseparate tax return, although the owner mustprepare a Schedule C to be included in his or herindividual tax return.

3 While the assets of a soleproprietorship (including its name) can be sold,it is not possible to transfer a sole proprietorshipto someone A partnerships is a form ofbusiness entity involving two or more owners. Apartnership is not taxed as a separate entity(though it does file an informational tax return)and all profits and losses flow through from thepartnership to the individual partners and must beincluded in the individual owners returns. Thereare several types of partnerships: generalpartnership, limited partnership (Ltd.)

4 , jointventure, and limited liability partnership ( )are the most common. A general partnership is,in many respects, similar to a sole proprietorshipexcept that it involves more than one owner. Allpartners are liable for the debts and liabilities ofthe partnership and, ordinarily, all partners areable to bind the partnership. Unless they agreeotherwise, all partners have equal managementrights. Generally speaking, changing partners , orthe death of a partner , dissolves a generalpartnership, so general partnership interests arenot readily transferrable (though there are waysto minimize the disruptive effects of this aspectof a general partnership).

5 A joint venture is aspecial kind of general partnership formed topursue a single business project (for example,development of an apartment project) and oncethat undertake is finished, the venture limited partnership is a partnershipcomposed of one or more general partners andone or more limited partners . The generalpartners have unlimited liability for the debts andliabilities of the partnership, but so long as theyremain passive investors and do not participateactively in the operations of the business, limitedpartners are liable for the partnership s debts onlyto the extent of their investment.

6 Limitedpartnership interests can be transferred andgeneral partners can be replaced, provided thepartnership documents so allow, so there isgreater transferability of interest in a limited liability partnership is a formof partnership typically employed byprofessionals (such as lawyers or accountants). Inthis form of partnership, the partners haveunlimited liability for their own acts, but not forthe debts of the partnership nor for the liabilitiesof the other partners (except to the extent of theirinterest in the partnership).

7 Limited liabilitypartnerships can have provisions for thewithdrawal of partners or the admission of newpartners without affecting the existence of liability partnerships and limitedpartnerships require filing of forms with the stateto create. It is strongly recommended that alawyer draft a Partnership Agreement for thepartnership, regardless of which kind ofpartnership is chosen, since the parties need toagree in advance on may things, such asmanagement responsibilities and rights,distribution of profits, responsibility forproviding additional money to the business (ifneeded), what should happen upon the death orwithdrawal of a partner , and a number of otherissues.

8 Corporation. A corporation is a separatelegal entity owned by its shareholders, managedby a board of directors, and operated by itsofficers. Establishment of a corporation requirespreparation and filing of Articles of Incorporationand submission of information to variousgovernment offices. If legal formalities arefollowed, the owners are not liable for the debtsor liabilities of the corporation. Further, shares ofstock of a corporation may be freely transferred(bought and sold) (subject to applicable state orfederal securities laws and regulations).

9 Unlikepartnerships and sole proprietorships,corporations are subject to Texas franchise are several different kinds of corporations,including C Corporations, S Corporations, CloseCorporations, Professional Corporations ( ),Professional Associations ( ), and LimitedLiability Companies ( ). A C corporation is taxed separately fromits owners. This can lead to double taxation because the profits are taxed first to thecorporation and then, if they are distributed to theshareholders (as dividends), taxed again. An Scorporation is, essentially, a corporation taxed asif it were a partnership.

10 That is, the profits andlosses flow through to its owners rather thanbeing separately taxed in the corporation. Thereare limitations as to the number and kinds ofowners an S Corporation may have. A closecorporation is a type of corporation designed forsmaller companies, owned by a relatively fewnumber of shareholders. In a closed corporation,the shareholders manage the corporation withouta board of directors or officers, simplifying legalrequirements. Professional corporations andprofessional associations are corporationsestablished for professionals (such as doctors orlawyers) to take advantage of certain taxopportunities available to corporations, withoutcreating limited liability for professionalmisconduct (prohibited by state law for suchindividuals).