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Right for You?
General Partnership
One of the simplest and most common ways for small businesses to
bring in additional capital or someone with sought-after
complementary skills is in the form of general partnerships. In these
types of partnerships, stakes are evenly divided among each partner
unless otherwise specified in a partnership agreement. All gains and
losses general partnership are routed directly through to the individual
partners’ personal tax returns and the business is typically not taxed
as a separate entity, although it must still file a return detailing the
revenues and expense of its partners (Form 1065). And because
payroll isn’t required for general partners, if a company consists
entirely of partners and has no employees, the paperwork
requirements can be much simpler than that of a corporation.
However, general partnerships have some distinct disadvantages. The
most important of these involves the risk exposure to the partners,
who are jointly and severally (individually) liable for any debts or
judgments against the company, which means the partners’ personal
assets (home, car, investments, etc.) could be vulnerable to creditors.
Also, many state laws mandate that if any one of the partners leaves or
dies, the partnership is immediately dissolved, which can make
succession planning more and legally tenuous.
Limited Liability Company (LLC)
Started nearly 30 years ago as a hybrid between corporations and
traditional partnerships, LLC’s have proven to be an increasingly
popular strategy for small business owners. LLC’s allow multiple
owners of a company to directly share in profits as they would in a
sole proprietorship or general partnership while shielding their various
personal assets from liabilities or debts incurred by the business,
protections normally found only in fully incorporated companies. A
simple Operating Agreement establishes the LLC and sets up the rules
for governing the company as well as the rights and responsibilities of
each partner, or member.” As part of an LLC, members have the
flexibility to chose whether to pass-through company profits to their
personal tax returns or to have the business taxed as a separate entity.
Subchapter S Corporation (S-Corp)
Similar to traditional C-Corporations in every way except for a different
tax structure, S- Corps have become quite popular among many small
business owners. This is because S-Corporations offer the same tax
advantages of sole proprietorships or partnerships—where all income
is passed through to the shareholders’ individual tax returns—as well
as offering the liability protections inherent to a corporation.
The downside of S-Corporations includes increased administrative
costs, a much more extensive set of rules and by-laws to follow
regarding corporate governance, and closer scrutiny by the IRS. Also,
federal regulations require that all S-Corporation shareholder-
employees are paid prevailing wages (subject to Medicare, FICA, and
any applicable state income taxes), before any profit distributions can
be made.
© 2007 MacGregor Lyon, LLC
