For example, if a lawsuit is brought against the business or there are legal debts to take care of, each partner will be held personally liable and may need to offer up their personal assets to resolve the issue.
A joint venture is a type of general partnership that has a specific end date or will dissolve after a certain amount of time. Just as in a general partnership, all partners in a joint venture are equally responsible for the operations of the business, along with any profits, losses or debts.
A limited partnership must have a minimum of two partners, where one is the general partner and the others are limited partners. All of the partners have some amount of liability. The general partner has unlimited liability, and the limited partners only hold liabilities up to the amount of their initial investment in the business. They are akin to silent investors and are not responsible for any of the daily management of the business.
A limited liability partnership is typically a better business option if the partnership has more than two people. Having multiple owners of a business working together can raise its own set of problems, including conflicting opinions on how to operate the business. All partners are also able to manage the business, unlike a limited partnership.
A limited liability limited partnership is a business entity that allows for more than one general partner and an unlimited number of limited partners. In a limited liability limited partnership, it is possible for the general partner s to have personal liability. Limited liability limited partnerships are still new, so there are some states that do not allow for their formation.
Related: Sole Proprietor vs. Independent Contractor: The Differences and Similarities. There are three main ways that a sole proprietor operates, depending on the services the individual offers and the relationship they have with the company or person they are working for or with. The three types of sole proprietorships are:.
For example, this business owner may do social media marketing for a list of clients or perform landscaping services for a group of customers. In each case, the individual is self-employed. Although regulations vary by state, you may not have to file official business formation paperwork to be considered a sole proprietor. Any freelancer or independent contractor who works for a company—but is not on their payroll—is a sole proprietor. When signing up for this type of work, it's likely that you'll fill out a W-9 form with your social security number so you can include any income earned in your yearly tax return and the business can deduct wages paid to you.
A franchise could be considered another type of sole proprietorship. In some states, if you co-own a business with your spouse, your business is still a sole proprietorship. For some business entities, like corporations and LLCs , you have to file formation documents with the state such as Articles of Organization to create the business. By contrast, you create a sole proprietorship as soon as you accept money for your goods or services, and you do not file any formation paperwork.
When you form a sole proprietorship, although you are the only owner, you do not have to work alone. You can hire employees, freelancers, and consultants to help run your business.
However, you are the one responsible for making the decisions for the business and all of the profits and losses will go to you. When you and someone else start doing business with the intent of making a profit, you have a partnership, sometimes referred to as a general partnership.
The partnership might begin with signing an agreement to work together, or you could have an informal relationship based on a conversation and a handshake. Your partner could be an individual or a business, and you can have an unlimited number of partners.
As with sole proprietorships, you do not file anything with the state to form a partnership. The benefit of a partnership over a sole proprietorship is that you'll share the responsibilities, resources, and losses. On the other hand, you also split your profits, and you might face disagreements over how to run the business. One way to mitigate conflict is to create a partnership agreement. The law does not require partnerships to have a partnership agreement , but you could benefit from creating the document to clarify each partners' expectations and roles within the business.
In the agreement, you can specify how the partners will share responsibilities, profits, and losses. You can provide for when and how the partnership can end, and whether partners can transfer their interests in the business to third parties. You can read more about partnership agreements here. Sole proprietorships and partnerships have the same responsibilities when it comes to business licenses and name registrations.
Although you don't file formation paperwork with the state to form a sole proprietorship or a partnership, you are not off the hook for other business licenses or permits.
Some towns and counties require all businesses to obtain a local license or permit. Depending on the goods or services you provide, you might need specialized licenses from government agencies, such as a food handler's permit or a license to sell cannabis.
The personal assets of shareholders are not subject to the liabilities of the corporation. If a corporation meets Internal Revenue Service requirements, it may select alternative tax treatment. S corporation status allows a corporation to pass profits or losses directly to shareholders, avoiding taxation at the corporate level. S corporations provide shareholders with the same limited liability status of corporations. Sole proprietorships, partnerships, and corporations each provide distinct advantages and disadvantages depending on the number of owners, type of taxation, and liability you desire for your business.
While determining what structure would work best for you, also factor in your state's laws to see if there may be any pros and cons that could further help you with your decision. This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.
How a Sole Proprietorship Works A sole proprietorship is one of the easiest forms of business to start partially because it requires no filing of documents. How a Partnership Works A partnership is a business owned by two or more people that requires no filing of documents. How a Corporation Works Unlike a sole proprietorship or partnership, forming a corporation requires filing articles of incorporation with the state where the corporation will conduct business.
Ready to incorporate your business? Get started now. Internal Revenue Service: Corporations. Internal Revenue Service: S Corporations.
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