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#201 Types of businesses (Corp., Partnership, LLC, LLP, etc.)

mp3 #201 Forms Of Business Enterprises (mp3 file)

If you are thinking about starting a business, incorporating or changing the structure of an existing business there are many considerations that need to be addressed. An experienced business formation attorney can help you determine the best course of action, and assist you with the application process. Continue here to be referred to an experienced and insured business formation attorney.

The three basic forms of business enterprises are a sole proprietorship, a partnership, and a corporation.

A sole proprietorship is an unincorporated business with a single owner, regardless of the number of employees. A sole proprietor has fewer government regulations, and the business is less expensive to maintain. However, it is sometimes difficult for a sole proprietor to secure financing for the business, since the owner's personal resources may be the only collateral available.

Another form of business is a partnership. It is an association of two or more people, who conduct business for profit and share the ownership. There are general partnerships, and there are limited partnerships.

General partnerships are most common, and can be formed with or without a written agreement. All general partners share in operating the firm, and each partner has unlimited liability for the debts incurred by the partnership.

A limited partnership is created by a formal certificate of limited partnership. This document is signed by each of the partners, and is recorded in the records of all the counties which the partnership conducts business or owns real property. Partnership laws may vary from state to state. A limited partnership may have one or more limited partners, and one or more general partners. Limited partners are free of general liability for the debts of the firm. They risk only their investment, if the firm fails to pay its bills. A general partner's liability, in either a general or limited partnership, goes beyond his or her capital investment, and includes his or her personal assets as well.

A limited partner may take part in the management of the partnership, but usually does not. If a limited partner does choose to take an active part in managing the business, he or she may be treated as a general partner, and be subjected to unlimited liability for the obligations of the partnership.

A third form of partnership is limited liability partnerships, which may only be formed by licensed persons for the practices of public accountancy, law or architecture. A limited liability partnership must have two or more licensed partners.

Partnerships are not subject to income tax. Each of the individual partners reports his or her share of the income, gains, losses, deductions and credits on his or her personal income tax return.

Still another form of business enterprise is the corporation.

A corporation is a legal entity which is separate from the people who own it - the shareholders. The government has laws and rules to create, regulate, tax and dissolve corporations. For example, a California corporation is formed by filing articles of incorporation with the California Secretary of State. Shares of stock, which represent the shareholder's financial interest in the corporation, may be issued. The life of a corporation is perpetual, unless otherwise provided by law or in the articles of incorporation.

By-laws are the specific rules adopted by a corporation, and are normally prepared by an attorney. They contain such information as the nature and timing of director and shareholder meetings, as well as the election of corporate officers. Unlike sole proprietorships and partnerships, a corporation is managed by a board of directors which is elected by the shareholders at an annual meeting.

The main advantages of a corporation are its long life, greater access of capital, limited liability of shareholders and easy transfer of ownership. On the other hand, corporations are more expensive to establish and operate, shareholders do not participate in the management of their property, and there are more government regulations. Corporations are required to pay state franchise taxes and income taxes, and shareholders may also pay taxes on their dividends and capital gains.

For information about forming a corporation in California, take time to review SmartLaw message 202, "How to Form a Corporation". Also, the California Secretary of State’s website has additional information about business entities at

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