Business Entity Forms. Part I: Sole Proprietorships and Partnerships.

SOLE PROPRIETORSHIP

A sole proprietorship is owned and run by one individual (although a husband and wife can qualify as sole partnership) who is personally liable for all losses and debts. It is the most common form of starting a new business because it is the simplest and least expensive type of business to establish.
Pros:
- Can be established instantly without filing any paperwork.
- Profits or losses reported on a federal Schedule C. No separate tax filing required.
- No need to pay unemployment tax on oneself.
Cons:
- Unlimited personal liability. Purchasing insurance is highly advisable.
- Investors tend to disfavor SPs and prefer a more formal entity.

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GENERAL PARTNERSHIP

General Partners share equally in management and profits of GP. Profits are taxed as personal income for the partners.
Pros:
- Easy to set up without filing with the state or formal agreement between the General Partners. Written formal agreement, however, is advised to prevent potential misunderstandings.
- Easy to dissolve. If the GP was created for a specific task, it is dissolved automatically upon completion of that task.
- No estimated tax requirements in California.
Cons:
- Each General Partner is jointly and severally liable for the debts of the partnership and other partners. Insurance advised.
- Investors may prefer a more formal entity.


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LIMITED PARTNERSHIP

An LP has at least one General Partner and at least one limited Partner. GP has unlimited responsibility and is primarily responsible for business affairs of the entity, while LP’s liability is limited to his/her capital contribution, unless the partners agree otherwise. To form an LP in California, a Certificate of Limited Partnership (Form LP-1) must be filed. A limited partnership formed in another state must register with the California Secretary of State prior to conducting business in California. A California LP must pay an annual tax of $800.
Pros:
- Relatively easy to set up.
- More flexible apportionment of risk and management responsibilities than GP.
- LP is not taxed as an entity. Instead, partners file their personal income tax returns and may offset losses against their income from other sources.
Cons:
- Limited Partner has limited decision-making authority within an LP.
- General Partner has unlimited personal liability.


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LIMITED LIABILITY PARTNERSHIP (LLP)

All LLP partners enjoy limited liability protection but may participate in managing business affairs just like general partners. In California, LLPs are limited to individuals licensed to practice in the fields of public accountancy, law, architecture, engineering or land surveying. An LLP formed in another state must register with the California Secretary of State prior to conducting business in California.
Pros:
- Partners’ personal assets are shielded from liability.
- Partners may be shielded from liability for actions of other partners, although they remain liable for own wrongdoing.
- All partners may actively participate in the management affairs.
- LLPs are not taxed on their income; partners file their own individual tax returns instead. (Note: in California, LLPs still pay $800 per year for the privilege of doing business in the state).
Cons:
- Limited to specific professional services in California.
- California, and a number of other states, require insurance.

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LIMITED LIABILITY LIMITED PARTNERSHIP (LLLP)

An LLLP must have at least one general partner and at least one limited partner, just like a Limited Partnership. The main advantage of an LLLP is that it limits the general partners’ personal liability for obligations of an LLLP. LLLPs cannot be formed in California, but an out of state LLLP will be allowed to do business in the state upon registering with the California Secretary of State and paying an annual tax of $800. Nevada allows formation of LLLPs.


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