Choosing A Business Entity

By: Jonathan Kramer, C.P.A.

Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.

The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.

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The form in which you conduct your business can have profound tax and legal liability implications. Summarized below are four commonly used business entities listing their primary advantages and disadvantages; Future articles will discuss the other two commonly used business entities (C Corp and S Corp) and other differences between all these forms of doing business. 

SOLE PROPRIETORSHIP - This form is limited to single owners. It is the simplest form of doing business, requires the least amount of paperwork to establish, and is the most economical to maintain. No special tax filings are required; however a detailed schedule of income and expenses needs to be included annually with your individual income tax return. This form of doing business provides no liability protection, i.e. you can be sued for product liability, personal injury or under any other legal basis for matters related to your business. 

GENERAL PARTNERSHIP - This form of business entity is similar to a sole proprietorship but is used when there is more than one business owner. As in a sole proprietorship, it does not afford its owners (partners) any legal protection. Forming a general partnership is straightforward. A partnership agreement should be executed defining the partners' rights and responsibilities and setting forth the economic relationship of the partners. A partnership return needs to be filed annually listing the business' income and expenses; each partner reports his share of the partnership net income on his individual income tax return. One of the major advantages of conducting business via a partnership is the flexibility afforded partners to allocate the partnership net income amongst themselves however they wish, provided that the allocation has "substantial economic effect". This often creates tax planning opportunities. 

LIMITED PARTNERSHIP - This form is identical to a general partnership except that there is at least one general partner and at least one limited partner. The limited partner(s) is(are) shielded from legal liability and from any claim asserted against the partnership. The general partner, however is liable just as in a general partnership. This form of entity is most commonly used when a business venture requires investment capital. The investor receives an equity participation in the venture for his capital contribution; however his limited partner status guarantees him that he will not be at risk other than for the amount of capital he invested. Equally important, as in a general partnership the partnership net income can be allocated amongst the general and limited partners to maximize the tax advantages to the limited partners who funded the venture. This form of doing business requires significant paperwork and up-front costs including legal fees and publication costs. 

LIMITED LIABILITY COMPANY - This newest form of doing business, adopted by most of the States, is similar to a limited partnership with one major exception. It does not require any of its owners (called members) to have legal liability. In this regard it is similar to a corporation which affords its owners (called shareholders) legal protection. Most advisors believe that this form of doing business is the "best of all worlds", providing the legal liability protection of a corporation while allowing the tax allocation flexibility of a partnership. This form of doing business has been embraced by the real estate industry as the entity of choice. 

EDITOR'S NOTE: Jonathan Kramer, CPA, is a partner in the accounting firm of Kramer, Regen, Benz, Zitolo, CPA's, with offices at 317 Madison Avenue, Suite 708 , New York, NY 10017. 

Telephone (212) 661-2720; Facsimile (212) 681-6140 

Mr. Kramer's firm has contributed this article in the public interest. It is neither intended as legal advice nor accounting advice. Nor is any professional relationship intended or established with the reader by virtue of browsing this article. Neither Mr. Kramer nor Kramer, Regen, Benz, Zitolo, CPA's, are affiliated with Hollander and Company LLC. The information contained in the article is believed to be accurate but should not be relied on without independent advice of an appropriate professional.

Copyright © Jay Hollander, 1998. All Rights Reserved.