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This website only contains general legal information and does not contain legal advice. Zariah A'londra Tax and Legal Services is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.


  1. Business Formation Law in the United States is regulated by state authorities. Nevertheless, most state business laws are very similar. Additionally, a few federal laws affect business formation considerations, as well, such as federal tax laws, employment laws, etc. Types of Businesses Entities.
  2. Sole Proprietorship. A form of business in which one person owns all the assets of the business in his or her own name. A person who does business for himself or herself and who does business without formally creating a separate business organization is engaged in the operation of a sole proprietorship. Many small businesses operate as sole proprietorships, including professionals, consultants, and other service businesses. Often, these are businesses that require minimal amounts of capital. A sole proprietorship is not a separate legal entity, like a partnership or a corporation, and thus, no legal formalities are necessary to create this form of business, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity the sole proprietor must report income and expenses from the business on Schedule C of her or his own personal federal income tax return. A major concern for persons organizing a business enterprise is limiting the extent to which their personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole proprietorship gives the least protection because the personal liability of the sole proprietor is generally unlimited. Both the business assets and the personal assets of the business owner are subject to claims of the business's creditors. In addition, the existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship.
  3. General Partnerships are a joint business in which responsibility for management, profits, and, most importantly, the liability for debts is shared by the general partners. Anyone entering into a general partnership must remember that each general partner is liable for all the debts of the partnership. Furthermore, any partner alone can bind the partnership on contracts. In essence, a general partnership is a collaboration between two or more sole proprietors.
  4. Limited Partnerships are a special type of partnership that are very common when people need funding for a business, or when they are putting together an investment in a real estate development. A limited partnership requires a written agreement between the business management, who are general partners, and all of the limited partners. Each limited partner makes an investment of funds into the partnership and is supposed to receive a predetermined share of the profit, which is ordinarily greater than that of each of the general partners. The maximum number of limited partners is set by state law to prevent using interests in the limited partnership as if they were shares of stock in a corporation. In addition to priority in profit, tax deductions, and potential share in the success of the enterprise, the limited partner is "limited" in potential loss, since all he or she can lose is his or her investment, and the general partners alone are subject to claims, debts in bankruptcy, and lawsuits against the partnership. Limited partnerships must file their name and names and addresses of general partners with the Secretary of State or other designated officer in the state in which the partnership is created so the public can find out who the responsible parties are.

LLC's and S corps have much in common, let's review below:

  1. Limited liability protection. The owners of LLCs and corporations are not personally responsible for business debts and liabilities. Instead, the LLC or the S corp., as the owner of the business, is responsible for its debts and liabilities. 
  2. Separate entities. Both are separate legal entities created by a state filing. However, they are formed under and governed by very different state business entity statutes.
  3. Pass-through taxation. Both are pass-through tax entities. (Although an LLC can choose not to be taxed as pass-through if the owners so choose). With pass-through taxation, no income taxes are paid at the business level. Business profit or loss is passed through to owners’ personal tax returns. Any necessary tax is reported and paid at the individual level.
  4. Ongoing state compliance requirements. Both are subject to certain obligations imposed by the state corporation and LLC statutes, such as having to appoint and maintain a registered agent, filing annual reports and paying annual fees, notifying the state of certain changes such as a change of name, registered agent, or entity type and having to qualify to do business in states outside of the formation state.

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