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6/12/07

The Types of Business Organizations

Business entities can be distinguished into two different categories: (1) unlimited liability entities; and (2) limited liability entities. In order for you to have a better understanding of these various entities, this post will be broken into two parts. This part will discuss unlimited liability entities.

Unlimited liability entities mean that in the even that you get sued, a claimant has the possibility of recovering against all of your assets. You are not personally protected if you form an unlimited liability entity.

Two types of unlimited liability business entities exist: (1) a sole proprietorship; and (2) a general partnership. You may be wondering why somebody would set up one of these entities. If you can be held personally liable for all judgments against your business, what is the advantage of forming one of these? Although a person may be held personally liable, there are some advantages to setting up one of these entities.

First, no filing requirements exist with either of these entities. This is great because you literally save hundreds, if not thousands, of dollars. States require a filing fee and the execution of certain documents for other entities, however, these two unlimited liability entities require neither.

Second, both of these entities are very easy to operate. There are no board of directors, no stock holders, and no other level of management except you. This creates a very easy management situation because you only have you to answer to.

Last, these entities do not have the problem of double taxation. In other words, any money the company makes is not taxed separately from the money is distributes. The money saving tax advantage to this is obvious.

Unfortunately, some negatives exist in forming these types of entities. First, and most obviously, you are unlimitedly liable for all debts and judgments. This can literally financially ruin you.

Second, raising capital can be difficult. You cannot sell shares of stock because there are no shares. Usually, you bring all of the money to the table or you have to take on a partner in order to receive capital.

Last, you cannot transfer your interest in these entities. In other words, you cannot sell your ownership in these companies. The effect of selling your interest is the dissolution of the previously existing entity. For example, if you owned a corporation, you could sell your stock to whomever you want (and thus in effect, sell your ownership interest in that company) without creating a dissolution. The same is not true with these unlimited liability entities.

The previous was just a brief overview of some of the various entities you can form. Do not dive head first into forming a company. Although they offer various business and tax advantages, you will probably want to talk with a lawyer before forming anything.

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