You may operate your business under any one of several organizational structures. Each type of structure has certain advantages and disadvantages that should be considered. You should contact an attorney, accountant, financial advisor, banker, or other business or legal advisor to determine which form is most suitable for you.
A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorships are the most common form of business structure. This type of business is simple to form and operate, and may enjoy greater flexibility of management and fewer legal controls. However, the business owner is personally liable for all debts incurred by the business.
A General Partnership is composed of two or more persons (usually not a married couple) who agree to contribute money, labor, and/or skill to a business. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.
A Limited Partnership* is composed of one or more general partners and one or more limited partners. The general partners manage the business and share full in its profits and losses. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the business. Note: Beginning in January 2010 a limited partnership may opt to become a Limited Liability Limited Partnership* by including a statement to that effect in its certificate of limited partnership. Status as a limited liability limited partnership provides general partners with a shield from liability for obligations of the limited liability limited partnership.
A Limited Liability Partnership (LLP)* is similar to a General Partnership except that normally a partner does not have personal liability for the negligence of another partner. This business structure is used most commonly by professionals such as accountants and lawyers.
The Limited Liability Company (LLC)* An LLC is formed by one or more individuals or entities through a special written agreement. The agreement details the organization of the LLC, including: provisions for management, assignability of interests, and distribution of profits or losses. Limited liability companies are permitted to engage in any lawful, for profit business or activity other than banking or insurance. Doing business as an LLC may yield tax or financial benefits.
A Corporation* is a legal entity, a corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as decreased personal control. Corporations may be formed for profit or nonprofit purpose.
A Nonprofit Corporation* A nonprofit corporation is a legal entity and is typically run to further some sort of ideal or goal, rather than in the interests of profit. Many nonprofits serve the public interest, but some do engage in private sector activities. If your nonprofit organization is or plans to fundraise from the public, it may also be required to register with the Charities Program of the Washington Secretary of State.
The Charitable Solicitations Program* registers individuals, organizations, and commercial fundraisers that solicit charitable donations from the general public. Both the benefiting charities as well as independent, for profit entities soliciting funds must, in most cases, register annually.
The Charitable Trust Program* registers individuals and organizations that are holding assets in Washington State in trust for a charitable purpose. The assets are invested for income-producing purposes. The income is then designated and distributed for a charitable purpose according to the terms and conditions of the trust agreement.
Charitable Solicitation and Charitable Trust registrations are separate from and in addition to corporate filing requirements.
Items marked with * must register with the Secretary of State, Division of Corporations and Charities.
|Considerations||Sole Proprietor||General Partnership||Limited Liability Company (LLC)||Corporation||Limited Partnership (LP)||Limited Liability Partnership (LLP)|
|File or register with Washington Secretary of State||No||No||Yes||Yes||Yes||Yes|
|Liability||Sole proprietor has unlimited liability||Partners have unlimited liability||Members are not typically liable for the debts of the LLC||Shareholders are not typically responsible for the debts of the corporation||At least one general partner has unlimited liability||Partners are not typically liable for the debt of the LLP|
|Operational Requirements||Relatively few legal requirements||Relatively few legal requirements||Some formal requirements but less formal than corporation||Board of directors, annual meetings and annual reporting required||Some formal requirements, but less formal than corporations||Some formal requirements, but less formal than corporations|
|Management||Sole proprietor has full control of management and operations||Typically each partner has an equal voice, unless otherwise arranged||Members have an operating agreement that outlines management||Managed by the directors, who are elected by the shareholders||Limited partners are excluded from management unless they serve on the board of directors||All partners have the right to manage the business directly|
|Federal Taxation||Not a taxable entity. Sole proprietor pays all taxes||Not a taxable entity. Each partner pays tax on his/her share of income & can deduct losses against other sources of income||Depending on structure there is no tax at the entity level. Income/loss is passed through to members||Taxed at the entity level. If dividends are distributed to shareholders, dividends are also taxed at the individual level
|Files taxes as separate entity, must meet certain criteria to avoid being taxed as a corporation
|Files taxes as a separate entity, must meet certain criteria to avoid being taxed as a corporation
|Washington Excise Taxation and Liability (Washington Department of Revenue)||Taxes based on business entity income. Sole proprietor has unlimited liability||Taxes based on business entity income. General Partners have unlimited liability||Taxes based on business entity income. Responsible parties may have liability for trust funds||Taxes based on business entity income. Responsible parties may have liability for trust fund taxes||Taxes based on business entity income. General Partners have unlimited liability. Limited partners may have liability up to the amount of their investment||Taxes based on business entity income. General Partners have unlimited liability. Limited partners may have liability up to the amount of their investment|
NOTE: This information is for reference only, for detailed considerations contact your trusted advisor.
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