A corporation is an independent legal entity owned by shareholders. This means that the corporation itself; not the owners, is held legally accountable for actions and liabilities that the business incurs.
In the United States, all corporations are created under the laws of the particular state. Laws of the state of incorporation control almost all matters of corporate governance, such as: powers of shareholders, board of directors, payments of dividends, acquisitions and mergers, etc.
When deciding to set up or invest in a business, it is essential to know the various forms of corporations and organizations. There are many important differences amongst them:
In a Sole Proprietorship, the owner of the business carries on the affairs of the business as an individual. Thus, she/he is personally liable for all debts and obligations of the business.
This includes taxes, which she/he must report all gains and losses in her/his own personal income tax return.
The term general partnership is a bit confusing. That is because all partnerships are general unless a particular statutory requirement for a limited partnership is complied with.
In all States general partnerships are governed by statutes devised based on Uniform Partnership Act (UPA).
The UPA defines a partnership as “association of two or more people to carry on, as co-owners, a business for profit.”
No formal registrations are required to form a general partnership: as soon as two or more people join together to operate a business for profit, a general partnership is automatically formed by operation of law.
Creation of Partnership by Estoppel:
In fact, when two or more people who do business, without the intention to be partners, may be found to have created a partnership by estoppel, if they represent to the outside world that they are in partnership together. Thus they may be liable for debts and obligations of each other.
The most important factor in a general partnership is that each partner is personally liable for all debts and obligations of the partnership.
Limited Partnership (LP)
All States allow the formation of an organization called: Limited Partnership.
Unlike General Partnerships, in order to create a Limited Partnership, the partners must file a formal statement of organization with the Secretary of State, and draw up a written agreement amongst them.
In a Limited Partnership there are two types of partners:
One or more General Partners, who are personally liable for the debts and obligations of the partnership.
One or more Limited Partners, who are not liable beyond their contributed amounts to the partnership.
4) Limited Liability Partnership (LLP)
In a Limited Liability Partnership (LLP), partners must file a formal statement of election with the Secretary of State. Once the partners file the statement of election, generally, no partner will be liable for the debts of the LLP beyond their agreed and/or contributed amounts.
LLP organizations are mostly preferred by professionals such as Lawyers and Accountants. The main reason for this election is that individual partners are, generally, not liable for malpractice committed by other partners.
5) Limited Liability Company (LLC)
Limited Liability Company (LLC) is a new form of organization, which has been recognized by all States, since the 1990s.
Those who have an interest in a Limited Liability Company (LLC) are referred to a “Members” rather than “Partners” in a Partnership.
Members can Limit their liability to the amount invested
Members can choose to be taxed either as a corporation or as a partnership
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