Introduction

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, P.S.

1048 WEST JAMES ST STE 102, KENT, WA 98032

 (253) 856-2745

RAYMOND@RAYMONDGESSEL.COM

 

We Listen.  We Advise.  We Act.