- Sole Proprietorships:
A sole proprietorship is a business that is entirely owned by one individual. A sole proprietorship is not a separate legal entity from its owner. Rather, it is the person who owns the business, with there being no legal distinction between the owner and the business. The person doing business as a sole proprietor has unlimited liability and is directly responsible for the business debts. The sole proprietor has complete control and responsibility, but may hire agents or employees. Typically no papers need to be filed with a government agency in order to engage in business as a sole proprietor. If the business is conducted under a name which is different than the owner’s name, or implies the existence of additional owners, then the owner usually should file with the county recorder, and publish, a "doing business as" (DBA) notice. A sole proprietorship has an unlimited duration, with its existence continuing for so long as the owner is willing or able to stay in business.
So, if you are engaged in an activity intended to make a profit (e.g. licensing invention rights or making and selling a product), with any profits or losses going to you ( in other words you have no partners who would share in the profits or losses), and you don’t operate through a separate legal entity like a corporation or LLC (discussed below) then in the eyes of the law you are a sole proprietor.
- General Partnerships:
If you are engaged in an activity intended to make a profit with one or more persons(e.g. licensing invention rights or making and selling a product), and any profits or losses will be shared between you, and you don’t operate through a separate legal entity like a corporation or LLC (discussed below), then in the eyes of the law you are probably a general partnership.
A general partnership is a business where two or more co-owners agree to engage in business for profit. It is usually not necessary to file papers with the government, or even have a written partnership agreement. In most respects a general partnership is simply a form of co-ownership by several persons who together own the business assets and are jointly and severally liable for the business debts. There is no limited liability, and each general partner has his entire personal resources at risk for all of the debts and obligations of the partnership. Absent an agreement to the contrary each partner has equal right to participate in management and control of the business, and profits are usually shared equally after contributions to the partnership have been paid back. As with a sole proprietorship, if the partnership uses a name other than that of the partners, a DBA may need to be filed with the appropriate government agency.
- Limited Partnerships
A limited partnership is has one or more “general” partners who manage the business and who are personally liable for partnership debts, and one or more “limited” partners who contribute capital and share in the profits, but who don’t participate in running the business. Limited partners incur no liability for partnership obligations beyond their capital contribution.
To create a limited partnership one must usually file a certificate of limited partnership with the appropriate government agency. Limited partners generally have the right to receive information and accountings from the partnership, attend partnership meetings, and inspect partnership records. A limited partner’s capital contribution may consist of any type of benefit given to the limited partnership, including money, services, loans, a promise to contribute cash or property, etc. . . .
Unless there is an agreement to the contrary, a limited partner’s only rights are generally to a return of their capital and a share of the profits. Profits, losses and distributions (including return of capital) are usually shared in proportion to the partners’ contributions, unless there is an agreement providing otherwise.
A corporation is a separate legal entity with its own identity, separate and apart from the persons who created it and from its shareholders. A corporation can be created only by a government agency (e.g. secretary of state). This ordinarily requires the filing of articles of incorporation containing certain essential provisions, payment of fees, etc. . . .
A corporation offers limited liability protection, meaning the the corporation as a separate legal entity is responsible for its own obligations and debts. The owners (shareholders), directors or officers of the corporation are not legally responsible for corporate liabilities. If there are losses in the business, the corporation must satisfy them from its own resources. The owners may indirectly experience the losses in that the value of their stock in the corporation may decline.
Typically the board of directors, who is elected by the shareholders of the corporation make policy and major decisions for the corporation. However, day to day management and interactions with third persons (e.g. customers or suppliers) is done through officers and employees. The same persons may be shareholders, directors and officers of the corporation, which is often the case in small corporations. Because it is a separate legal entity a corporation can continue its existence indefinitely.
It is important to note that the limited liability offered by the corporate form is not absolute and can be lost in certain circumstances (such as cases of fraud). The limited liability will also not protect shareholders who personally guarantee corporate debts or obligations, which creditors sometimes require when interacting with a small corporation.
- Limited Liability Companies
A limited liability company ("LLC") is a hybrid of a partnership and a corporation. An LLC combines the pass-through treatment of profits and losses for tax purposes like a partnership does, but still offers limited liability to its owners, who are usually referred to as "members". As with a corporation an LLC must be created by a government agency (usually the secretary of state) and requires the filing of articles of organization. There must also be an operating agreement between the members, however this does not always have to be in writing.
In some states an LLC need have only one “member”. Usually, the LLC members are not personally liable for the LLC’s obligations and/or liabilities. The members of an LLC manage and control the LLC. If an LLC is managed by all its members then each member can bind the LLC in the same way a general partner can bind a partnership. LLC profits and losses are distributed among the members as determined by the operating agreement; If the operating agreement doesn’t specify, then profits and losses are normally allocated in proportion to each member’s capital contribution. An LLC can continue indefinitely. Typically, an LLC is dissolved at the time specified in the articles of organization, upon the events specified in the articles or a written operating agreement, or by the vote of a majority of its members.