Richard P. Lindsey
rlindsey@webb-firm.com

Probably one of the most important decisions a new business owner must make is determining the appropriate type of entity to use for the ownership of the business. The different types of business entities range from a simple sole proprietorship to the more complex publicly traded corporation. While most small business owners need not concern themselves with the requirements of publicly traded corporations, such owners are concerned about the tax implications and personal liability ramifications of the various forms of business ownership.

While the simplest form of business ownership, the sole proprietorship, might seem attractive at first glance, this type of business entity should be avoided except for the simplest of businesses where personal liability exposure is minimal. Likewise, partnership arrangements should also be avoided, except in the simplest of businesses, to lessen personal exposure and to address abrupt business endings caused by partnership disagreements and untimely deaths of partners. The vast majority of business owners should consider one of the following three business entities: limited partnership, limited liability company, or corporation.

A limited liability partnership consists of two or more partners, one of whom must serve as the general partner. The general partner is subject to general liability for the actions of the business. The limited partner or partners have limited liability which is capped by the amount of investment made by such partners into the business. Limited partnerships must file a sworn certificate with the superior court of the county where the principal place of business is located. Likewise, a copy of the certificate must be on file in each county where the limited partnership maintains an office. The basic rights and liabilities of the limited partners are set forth in the Georgia statutes. Likewise, the basic obligations, rights, and powers of the general partner are set forth in statute. Details of the rights and obligations of the various partners to the business and to each other should be contained in a well-crafted Limited Partnership Agreement.

Contrary to a limited partnership, a limited liability company offers equal protections to all of the owners from certain business risks. A limited liability company is wholly owned by its members. The personal exposures and risks of the members, unless modified by written contract, are limited to the investment made by each member in the company. Management of the limited liability company is vested in its managers which may or may not be one or more of its member owners. Also, taxation by the federal government and state government of a limited liability company can be handled either like a partnership or a standard corporation depending on the tax treatment election made by the members. To determine the most equitable and advantageous tax treatment, the limited liability company members should seek the professional advice of accountants and lawyers. Finally, the allocation of profits to the members of the limited liability company can be somewhat more flexible than the allocation options available to shareholders of a corporation. A thorough discussion of the tax implications, the profit distribution, and the individual desires and goals of the limited liability company members should be conducted prior to the formation of the business.

Finally, a business owner may elect to form a corporation. A corporation is owned by shareholders, controlled by its directors and managed on a day-to-day basis by it officers. Oftentimes, a small business owner will wear the hat of a shareholder, a director, and an officer. Like limited liability companies, corporations offer a limit on the personal exposure of the business owners. Unless modified by contract, the shareholders of a corporation are generally not subject to greater personal liability in excess of the investment made into the corporation. Perhaps the greatest challenge for new business owners who have decided to establish a corporation for the ownership of their business is the decision of whether to be a regular "C" corporation or a "sub-chapter S" corporation. While the liability protections for the two types of corporations are the same, the tax treatments can be very different. There are possible advantages and disadvantages to the shareholders for both types of corporations. A decision over which type of corporation to choose should only be made after a thorough discussion with an accountant and lawyer.

All of the business entities are subject to certain governmental filing requirements. Two good resources for such requirements are the internet web page for the Georgia Department of Revenue and the internet web page for the Georgia Secretary of State. Your attorney and accountant will also be able to assist in identifying the various requirements for the various business entities.