How to Properly Incorporate a Family Business
~by Donya Zimmerman~
When starting a family business, you’ll need to determine the best way to incorporate it so you can protect your assets. By incorporating the family business with the proper governmental agency, you’ll ensure that the business is protected, and the business assets and personal assets are protected. With this type of protection, the family can enjoy being in business without the fear of losing everything. Also, it is good to have the proper business licenses needed to conduct business in certain states.
Here are the different types of incorporation that can be used for a family business to be seen as a legal entity:
Sole proprietorship. Simplest business form and not a legal entity. The business is not legally separate from the owner. The owner’s personal assets and obligations of the business are not distinguished.
General Partnership. This is the simplest form of partnership and is created when two or more individuals engage in business together for profit. A general partnership can begin with just a verbal agreement and a handshake. There is no liability protection in this form of business, and every partner is equally liable for all debts and obligations of the business. Also, the personal assets of each partner can be used to pay such debts.
Limited Partnership (LP). There are two classes of partners (general and limited). The general partners normally handle the day to day operations of the business, and are held personally liable for the business debts and obligations. Limited partners only contribute money and capital to the business. The limited partners are not involved in the daily operation of the business, and their personal liability does not go beyond their capital contributions to the business.
Limited Liability Partnership (LLP). This business entity is a hybrid and similar to a Limited Liability Company (LLC). All partners in the business handle the daily operation and management of the business. Unlike the Limited Partnership, Limited Liability Partnerships ensures that all partners’ personal assets cannot be used to satisfy the business debts and liabilities like an LLC. LLP partners are ensured that they will not be held accountable for the acts of other partners (they’ll have personal liability protection).
Limited Liability Company (LLC). An unincorporated business that can be formed by one or more individuals with no personal liability for debts of the LLC. An LLC is unique because for statutory purposes, it is treated like a corporation regarding limited liability of partners and partnership status for tax purposes.
Corporation. An independent entity. The corporation is separate from the owners of the business. There is no personal liability for owners of the business because the corporation is responsible for its own debts and liabilities. The business entity outlasts the death or disability of all stockholders.
S-Corp and C-Corp. These have the general guidelines of a corporation. Must be registered with the governmental agency, similar to a corporation. There is no difference between S-Corp and C-Corp for purposes of Corporate Law. S-Corp does not have double taxation like a C-Corp. C-Corp has double taxation because it is treated as a separate taxable entity, and distributions to stockholders are generally treated as dividends. S-Corp is generally a better option than C-Corp because it provides liability protection of a corporation while allowing tax treatment similar to a partnership.
This is the second article in my Starting a Family Business series. Stay tuned for more articles in this series.
You can read the first article in this series here: The Basics of Starting a Family Business
Meet the Author: Donya Zimmerman
Donya Zimmerman is a business consultant, mediator, and legal professional with over ten years of experience. Donya is also a public speaker and aspiring author.
She is owner of Family & Community Mediation and Business Consulting (FACMBC) and Powerful Biz Woman (subsidiary of FACMBC), both of which are based in Baltimore, MD.
Services provided by FACMBC: Mediation and Conflict Resolution Services; Business Registration Assistance; Business Plan Drafting Assistance; Business Certification Assistance; and Business Organization Assistance.
If you are thinking about starting your own small business or non-profit organization, do not hesitate to contact me because I can show you how to do so.
For more information about Donya:
- Email: email@example.com
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