Birth of a Company: Types of businesses

The way a business is set up affects how it works and determines whether it must file records with the government. A company’s initial filings can reveal important biographical details about a company — who created it, when and for what purpose. They’re akin to birth certificates for people.

Sole proprietorship

A sole proprietorship is a business owned and run by a single person. The owner is personally responsible for all of the company’s debts and losses. Typically, no paperwork must be filed with a state to begin operating as a sole proprietorship. But some might require licenses, depending on the type of work performed. A small store might fall into this category.

General partnership

A general partnership is a business with more than one owner that has not filed with a state to receive a status as a corporation, LLC or LLP. This arrangement leaves all partners equally liable for debts or court judgments against the business. Similar to a sole proprietorship, a general partnership is not usually required to register its creation with a state. All forms of partnerships are entitled to tax benefits that corporations don’t have, because a partnership’s income is only taxed as the income of the individual partners.

Medical practices and small law firms are common examples of general partnerships.

Limited partnership

A limited partnership involves two types of partners: general and limited. General partners manage the company and are responsible for its debts. Limited partners are liable only up to the amount they have invested in the partnership. The partnership is usually required to file a certificate of formation with a state’s secretary of state. Limited partnerships are often used for short-term projects such as filmmaking and real estate developments.

Limited liability partnership (LLP)

In a limited liability partnership, each partner shares the organization’s management responsibilities but is shielded from liability arising from another partner’s wrongdoing or negligence. Because of this protection, this is a popular organizational form for professionals in law and accounting firms.

Not all states allow the formation of LLPs, and some states limit the types of business that can be LLPs. An LLP is required to file organization forms, including a certificate of limited liability partnership, with the state.

Limited liability company (LLC)

The members of a limited liability company are not personally responsible for the company’s debts. LLCs also offer flexibility for taxation and reporting purposes. They are taxed like a partnership and don’t have to follow the same corporate governance rules as do major corporations.

In order to be legally recognized, LLCs are required to file documents with a state similar to articles of incorporation. For example, Delaware LLCs are required to file a certificate of formation with the secretary of state. LLCs are used by businesses in a wide range of industries.

Corporations

A corporation exists separately from the individuals who formed it. This structure, which most major companies use, allows shareholders to limit potential losses because they will not be liable for any of the corporation’s debts beyond what they have invested. For most legal purposes, a corporation is treated like an individual person. For example, you can file a lawsuit against a corporation.

A publicly traded corporation has shareholders. The corporation’s “shares” are traded on stock exchanges, such as the New York Stock Exchange of the NASDAQ. A publicly traded corporation is subject to the reporting requirements of the Securities and Exchange Commission. A wealth of public information is available regarding publicly traded corporations.

A privately held corporation does not have publicly traded shares. Rather, its shares are frequently owned by the company’s founders and their families. A privately held corporation is not required to give information to the SEC.