Forming a new business is full of decisions which may not only
affect the success of the business, but, also affect the Business owners'
ability to deal with lawsuits filed by outside parties as well as conflicts
that may arise between two owners who can't quite disagree. At Raymond V.
Gessel, P.S., we have over 20 years experience in advising clients on the best
type of legal entity as well the appropriate documentation to minimize owner
exposure and reduce the risk of the destruction of a business due to
irreconcilable disagreements between owners. For your reference, we have
provided the following brief synopsis of business entities which you may be
considering forming. Please note, this is only for general consideration.
Because there is significant amount of information that must be considered, you
should not rely solely on the information below in choosing a business form.
Sole
Proprietorships
The most common form of engaging in a small business is the
sole proprietorship. Simply put, any individual who chooses to own his own business,
without any other individuals and without forming an entity such as a
corporation, is a sole proprietor. The disadvantage to a sole proprietor is
that his personal assets are at risk for all liabilities of the business.
Corporations
A corporation is considered by the law to be a separate
person. A corporation is owned by its shareholders. One of the benefits of
doing business as a corporation is that, if set up and maintained properly,
shareholders are not liable for most Corporate obligations and liabilities.
Likewise, if the corporation is not setup or maintained properly, Shareholders
can find themselves personally liable for Corporate debts.
For tax purposes, there are generally two types of
Corporations: "C" corporations and "S" corporations. In a
"C" corporation, the corporation is taxed on its income separate from
its shareholders. A potential disadvantage to shareholders is that they will be
taxed twice on corporate money: First when the corporation receives it and
second when when it is distributed to its shareholders.
In an "S" corporation, the income tax consequences
pass directly through to the shareholders thus subjecting them only once to
taxation on corporate earnings.
General
Partnerships
A general partnership is an association of 2 or more people
engaged in business together for a profit. Unlike a corporation, partners are
personally and jointly liable for all liabilities of the partnership including
liabilities incurred as the result of actions which a partner engaged in on
behalf of the partnership of which the other partner may have been unaware.
Under Washington law,
partnerships may be formed without any formal agreement, however, it is best to
have a formal agreement between the parties to avoid unintended consequences
because the partners failed to enter into a written agreement on key issues
regarding the partnership. For tax purposes, the individuals are taxed for
their respective share of partnership earnings.
Limited
Liability Partnerships (LLP)
A limited liability partnership is similar to a general
partnership but formation must be in writing and filed with the State. In a
limited liability partnership, the partners are insulated from some (not all)
liabilities of the partnership provided the limited liability partnership has been
properly formed and maintained.
Limited
Partnerships (LP)
A limited partnership is one hybrid between a general
partnership and a corporation. Limited partnerships can only be formed in
writing. A filing with the State of Washington
is also required. A limited partner is managed by one or more general partners.
The general partners are liable for partnership liabilities. Limited partners
have no say in the operation of the business but are not liable for most
partnership liabilities provided they exercise no say in management of the
partnership and the partnership has been properly formed and maintained.
Limited
Liability Companies (LLC)
A limited liability company is another hybrid between
corporations and partnerships. Because in the history of business entities they
are relatively new in the state of Washington,
many people prefer them to corporations. If set up and maintained properly,
owners of a limited liability company may be shielded from company debts
similar to a corporation. However, tax treatment similiar to a partnership or,
in the case of a one owner company, a sole proprietorship, can
be elected by owners of an LLC. LLC's are formed by agreement. A filing with
the State of Washington is
required.
Maintaining
Your business - Purchasing another's interest
It is important that your business records are properly
maintained. Failure to follow formalities required of Corporations, Limited
Liability Partnerships, Limited Partnerships and Limited Liability Companies
may allow creditors to "pierce the veil" and recover judgments
against individual owners.
Additionally, when one acquires another's interest in a
business a number of factors should be considered and careful draftsmanship
utilized to minimize exposure for undisclosed liabilities.
We look forward to assisting you with your business needs.
THE LEGISLATIVE AND CASE LAW REGARDING BUSINESS ENTITIES IS
EXTENSIVE. THE OVERVIEW ABOVE IS INTENDED TO ASSIST YOU UNDERSTANDING
WHAT TO EXPECT IN FORMING OR MAINTAINING A BUSINESS ENTITY AND IS PROVIDED FOR
GENERAL INFORMATIONAL PURPOSES ONLY. IT IS NOT INTENDED TO ASSIST YOU IN
BEING YOUR OWN ATTORNEY. FAILURE TO PROPERLY FORM, MAINTAIN, PURCHASE OR
SELL AN INTEREST IN A BUSINESS CAN RESULT IN SERIOUS PERSONAL FINANCIAL LOSS
AND LIABILITY. THEREFORE, IT IS ILL-ADVISED TO ACT AS YOUR OWN ATTORNEY
IN THESE AREAS. DO NOT RELY ON THESE MATERIALS IN ACTING
AS YOUR OWN ATTORNEY.
RAYMOND V. GESSEL Attorney At Law 1122 WEST JAMES
ST STE 102, KENT, WA98032 (253) 856-2745 RAYMOND@RAYMONDGESSEL.COM
