Starting a New Business for the New Year
By Raghu R. Raju
-attorney
You may be interested in starting a business this New Year but are puzzled by what business form to adopt. This question requires you to consider your personal and business circumstances in light of four key business formation issues: legal formalities, personal liability, management, and tax. In Georgia, the main business types include a sole proprietorship (SP), a general partnership (GP), a limited liability partnership (LLP), a corporation, a limited liability company (LLC), a limited partnership (LP), and a limited liability limited partnership (LLLP). This article gives a short explanation of these business forms.
Sole Propietorship (SP)
Legal Formalities and Obligations:
SP formation requires no legal formalities. The SP may have to obtain local business licenses and permits. If operating under a trade name it should file a registration statement in the county it will chiefly transact business.
Management:
A SP is run by a ?sole proprietor? having complete individual business control. Generally the SP terminates when the sole proprietor passes away. Proper planning may avoid this result.
Personal Liability:
The sole proprietor is fully liable for any business debts and other obligations incurred. The sole proprietor?s personal assets, such as bank account and home, are at risk. Limiting personal liability is a major reason for choosing another business form.
Tax:
The sole proprietor reports SP income on his or her personal income tax return. A sole proprietor should regularly analyze the tax benefits and costs of operating as an SP to determine whether another form is optimal.
General Partnership (GP)
Legal Formalities and Obligations:
The Uniform Partnership Act governs general partnerships. A GP is an association of two or more competent persons carrying on a business for profit as co-owners. It is essentially a multi-person proprietorship. Although, no legal formalities or administrative burdens are required, the GP may have to obtain local business licenses and permits. If operating under a trade name it should file a registration statement in the county it will chiefly transact business. A GP may elect to become a limited liability partnership (LLP).
Management:
A GP?s owners are termed ?general partners?. General partners have rights of participation in management, profits and specific partnership property. A partnership agreement may outline the rights and obligations of each partner. Transfer of an interest in a GP entitles a transferee a right to profits but not an affirmative right to manage. A dissolution, or change in the legal relationship between partners, occurs at the death or withdrawal of any general partner. Statues may determine outcomes in certain situations where the partnership agreement does not control.
Personal Liability:
The general partners have ?joint and several? liability meaning they are fully personally liable for any debts and other obligations incurred by the business. One general partner may obligate all of the general partners in a contract. All general partners are responsible for any obligations resulting from lawsuits against the partnership that arise from ordinary business conduct. Limiting general partner personal liability is a major reason a GP may elect to conduct business as a limited liability partnership (LLP).
Tax:
GPs are ?pass-through? entities for state and federal income tax purposes. Each general partner accounts for his or her share of GP income, losses, deductions and credits in his or her personal income taxes. The partnership agreement may dictate allocation of tax accounts.
Corporation:
Legal Formalities and Obligations:
The Georgia Business Corporation Code governs corporations. The corporation must be registered with the Secretary of State and renewed annually. This requires filing articles of incorporation and paying fees. Corporations may have administrative burdens such as filings, publications, or record maintenance. Generally, a corporation is obliged to file a tax return. It may have to obtain local business licenses and permits. If operating under a trade name it should file a registration statement in the county it will chiefly transacts business.
Management:
A corporation is owned, managed and run by the shareholders, the directors and the officers, respectively. Shareholders own the corporation and elect the directors. The directors govern general corporate affairs and appoint officers. The officers conduct the daily corporate business. Individuals may serve more than one role. By-laws, a set of written rules, may govern the corporation. Bylaws may define the rights and obligations of the shareholders, officers and directors. A corporation continues to exist despite the death or withdrawal of a shareholder, officer or director. A corporation also has free transferability of ownership meaning a shareholder can sell his or her shares to anyone, at any time and at any price.
Personal Liability:
In a corporation, shareholders, directors and officers have limited liability. Generally, business debts cannot be collected from the officers, directors or shareholders. Thus, personal assets are not at risk. However if corporate and personal transactions are not kept separate the corporate veil may be pierced.
Tax:
Corporate income is taxed at both corporate and shareholder levels. Generally, a corporation must file a separate corporate income tax return. In addition, corporation shareholders separately report dividends from the corporation. Termed ?double taxation?, this is one cited as one of the main disadvantages of forming a corporation. Double taxation may be avoided if a corporation is eligible for ?S-corporation? tax treatment. The corporation is considered a pass-though entity for income tax purposes and income and losses are distributed in proportion to shareholdings.
Limited Liability Company (LLC)
Legal Formalities and Obligations:
The Georgia Limited Liability Act governs LLC formation. The LLC must be registered with the Secretary of State and renewed annually. This requires filing articles of incorporation and paying fees. An LLC may elect to be treated as a corporation for income tax purposes and file a corporate income tax return. Although there are minimal administrative requirements, an LLC may have to obtain local business licenses and permits. If operating under a trade name it should file a registration statement in the county it will chiefly transact business.
Management:
An LLC is owned and managed by one or more ?members?. An operating agreement may govern the LLC?s internal business affairs including determination of the rights and obligations of members, managers, and employees. If in accordance with the operating agreement members may appoint non-member managers. In certain circumstances, the operating agreement and/or articles of organization will pre-empt default statutory rules. An LLC has both continuity of life and freely transferable ownership.
Personal Liability:
The LLC shields members from personal liability from business debts and obligations unless a member has personally guaranteed a debt or obligation. To maintain limited liability protection, members should keep personal accounts and transactions separate from business accounts and transactions.
Tax:
An LLC receives pass-through tax treatment unless it elects to be treated as a corporation for tax purposes. If it chooses pass-through treatment, earnings will be apportioned to members and taxed at member tax rates. If it chooses corporate tax treatment it will be taxed at corporate tax rates.
Limited partnership (LP)
Legal Formalities and Obligations:
The Georgia Revised Uniform Limited Partnership Act governs LPs. LPs are required to register and pay a filing fee to the Secretary of State. Unlike corporations, LPs generally do not have burdensome administrative requirements such as filings, publications, or record maintenance.
Management:
An LP is owned by both general partners and limited partners. General partners have equal rights in management and may bind the LP in transactions with third parties. Limited partners, on the other hand, are often ?silent partners? who typically invest, share in profits, and do not actively manage even though permitted to do so in Georgia. A LP agreement may address the rights and obligations of general and limited partners. A limited partner can transfer his or her interest in the profits of the LP. If all other parties agree to a transfer of interest or the limited partnership agreement so stipulates, the transferee may become a limited partner. Where the LP agreement does not address a specific business situation generally statutes will control.
Personal Liability:
General partners assume unlimited liability while limited partners have limited liability. Generally, a limited partner is not liable for the LP obligations by reason of being a limited partner and does not become so by participating in the management or control of the business. General partners may avoid unlimited liability by electing limited liability limited partnership (LLLP) status through a filing with the Secretary of State.
Tax:
LPs like GPs are considered pass-through entities. Both general and limited partners are taxed according to their distributive share of the LP?s net profits. The LP agreement may outline their respective distributive shares which may or may not be equivalent to their respective ownership percentages. On the other hand, an LP may elect corporation tax treatment.
Discussion of a last business form, the professional corporation (PC) has been omitted but exists for certain professional practices.
Conclusion
The information given above is not intended to be legal advice. Ultimately the nature of the business and particular circumstances of the business owners will inform the decision of which business form to adopt. You are advised to consult an attorney to assist in making and executing this decision. Good luck starting a new business for the New Year and may it be a successful venture! o
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