GANFER & SHORE, LLP CLIENT CORPORATE LAW ADVISORY NOVEMBER 2011 SELECTING A FORM OF UNINCORPORATED BUSINESS ENTITY When a new business entity is created, one of the first tasks is selecting its form. Historically, the most common forms of business entity were the sole proprietorship, the general partnership, and the corporation. A sole proprietorship is an individual doing business using either his or her own name or an assumed name. The individual is directly taxed on the income derived from the business activity and is personally liable in the event of any claim against the business (in the absence of insurance coverage). A general partnership enables individuals or entities to invest and work together to achieve a common business objective. Profits and losses are shared as agreed by the partners; for tax purposes, the partnership’s income is “passed through” to the partners. Partners remain directly liable for uninsured obligations of the partnership. A corporation provides protection from personal liability under most circumstances and, except for a “Subchapter S” corporation, is taxed on its income at the corporate level. Shareholders of the corporation also pay income tax on any dividends they receive. Legislation enacted over the past several decades has created several additional types of unincorporated business entities. In New York, these include the limited partnership (LP), the limited liability partnership (LLP), and the limited liability company (LLC). Each type of entity has advantages and disadvantages, including with regard to personal liability, allocation of economic benefits among owners, and transferability, that bear on their suitability for a particular enterprise. Two or more parties may form a general partnership. A partnership may be created orally, but having a written partnership agreement setting out the parties’ economic arrangement is much preferred. Within limits, partners may establish any arrangement they choose regarding allocation of economic benefits, including gains and losses and the priority of distribution. One of the key advantages of a partnership or limited liability entity over a corporation is that economic benefits need not be identical for all of the partners, but may be based on the partners’ differing management or financial contributions. Partners’ liability to third parties for partnership obligations is unlimited. General partnerships may have an obligation to file an assumed or fictitious name certificate with state or local governments where they have been formed or are doing business, and may be required to publish the certificate in a local newspaper. A limited partnership has one or more general partners, whose liability to creditors of the partnership is unlimited (although any general partner may be a limited liability entity in its own right), and one or more limited partners, whose liability is generally limited to the agreed amount of their respective capital contributions specified in the partnership agreement. The business is managed solely by the general partner or partners. The limited partners’ only voice regarding the partnership’s business is usually a right to vote with respect to major events such as a proposed sale of the partnership’s assets. The provisions governing the allocation of economic benefits among the partners, the term of the partnership, transfers of interests in the partnership, and other matters are governed by the partnership agreement, which can offer flexibility similar to a general partnership agreement, except that management is exclusively within the general partners’ control. A limited partnership is also a “pass through” entity for tax purposes. To form a limited partnership, a certificate of limited partnership must be filed with the Secretary of State in the jurisdiction of its organization and, in many jurisdictions, the certificate must be published. The cost of the required publication, depending on the jurisdiction, can be significant (about $2,000 in New York). A limited liability partnership (LLP) is intended for use by professionals, such as physicians or lawyers. It is a relatively recent creation of state legislatures and is similar to the limited partnership, except that the liability of each partner to any creditor of the partnership is limited to obligations arising from that partner’s acts or those under his or her supervision, and excludes liabilities arising from acts or omissions of other partners. An LLP is also required to register and publish the details of its certificate of registration and, in New York, it must also file a short “Status Statement” every five years. An LLP is a pass-through entity for tax purposes. A limited liability company (LLC) is also a relatively recently authorized form of unincorporated business entity. It is an entity formed by members who enter into an Operating Agreement between one or more managing members and the other members. (It is possible to have a single-member LLC.) The Operating Agreement is akin to a Limited Partnership Agreement, covering the economic arrangements of the partners, term and termination, transfers of interests, and other matters. A key advantage of an LLC is that it permits non-proportional and prioritized allocations of economic benefits. An LLC, like a limited partnership, must file a certificate of formation with the Secretary of State and publish the certificate in a local newspaper. An LLC is also a pass-through entity for tax purposes. Finally, a Subchapter S corporation has the limited liability feature of any other corporation, but is taxed as a pass-through entity analogous to an unincorporated entity. To qualify for Subchapter S status, the corporation must file an election with the IRS. The corporation, among other limitations, must have no more than 100 stockholders and a single class of stock, and all stockholders must be treated identically with regard to benefits of share ownership such as distributions. If you would like assistance in determining which form of business entity is best for your needs, or have any questions about any other corporate or securities law issues, please contact Martin E. Schloss, Esq. or your contact at the firm. GANFER & SHORE, LLP TO HOST PANEL AND WINE-TASTING Ganfer & Shore, LLP is pleased to invite clients and friends of the firm to a wine tasting, seminar, and tour to be held on November 17, 2011 at the New York Design Center. The panel discussion will focus on employment law and electronic discovery and is entitled “Sex, Tattoos, and E-Mail Blunders.” The panel discussion will include Steven J. Shore, Robert I. Gosseen, and Mark A. Berman. This event will include an optional tour of the Design Center located at 200 Lexington Avenue (at 32nd Street) from 4:00 to 5:00 p.m., and the Legal Panel at 5:00 p.m., followed by an expert-led wine-tasting. To sign up, please call Amarilys Garcia at (212) 922-9250, ext. 262, or e-mail her at agarcia@ganfershore.com, by November 14, 2011. |
