I quit!! But wait...

You have been working for a long while now and longing to start your own business and just not sure when is the ideal time to do so. I cannot tell you the opportune moment for you, nevertheless I can give you some basic information on formation of a business.

In the United States, we have six (6) forms of businesses. These business types are Sole proprietorship, Corporations, Partnerships, S-Corporations, Trusts and Non-Profits. You may ask yourself what is the difference of creating a business using one form over another. Let us begin by defining each of the business types.

A sole proprietorship is commonly unincorporated. Aside being a business owner, a sole proprietor can also be an independent contractor whom does work in accordance to a set fee and/or time period, a consultant or freelancers (i.e., Barber/Hair-Stylist, Court Reporter, Transcriber, Sub-Contractor, etc…). There are no forms to create a sole-proprietorship; you would simply report your business income and expenses on IRS’ 1040 Schedule C form.

Corporations are incorporated businesses with at least one shareholder. Outside a sole proprietor, every form of business is considered a separate entity. In some jurisdictions a corporation must provide legal and financial protection to its shareholders. Shareholders of corporations have limited liability protection and corporations have absolute authority over the amount of profits they can distribute or retain. Corporations are presumed to be for-profit entities, thus they can continue in existence for indefinite years with losses in the accounting books.

Partnerships as well are unincorporated businesses as sole proprietorships. Similar to corporations, partnerships are separate entities from the shareholders. Distinct from corporations, partnerships must have at least one General Partner who assumes unlimited liability for the business and at least two shareholders, versus one shareholder to create a corporation. Unlike corporations, partnerships dispense all profits and losses to their shareholders without concern of any profits to be retained by the business for cash flow purposes.

S-Corporations have features similar to a partnership. The lone difference between an S-corporation and partnership is, an S-corporation must have at least one shareholder and can never have more than 100 shareholders. If any shareholder provides services to the business, the S-corporation must pay that shareholder a reasonable salary. This salary is a separate payment from distributions of profits or losses.

Non-Profit are corporations created for the purpose of charity, civic, or artistic purpose. Nonprofits are exempt from federal and state taxation on their income. However, nonprofits have the critical responsibility of reporting their actions, income, and assets to guarantee they are in compliance with federal and state laws.

Understanding and identifying which form of business would suit your needs better, is to be able to know firsthand the industry you plan on entering and the type of business you choose to form, and how much liability, if any, you want to expose yourself and personal assets to.

For instance, should I want to open a deli or small service shop, which would require simply my presence to operate, I would opt for a sole-proprietorship. However, if I intend to venture into an industry which I have no knowledge of, but have the capital to start, then I would certainly consider a partnership, selecting a general partner who is quiet knowledgeable in said industry to limit my liability should any fault should arise, being I am not in capacity of decision making in the day-to-day functions of the business, but would have unrestricted access to the operations.

A partnership differs from the other forms of business, because there are many avenues within the partnership type of business you may choose to pursue. You have General Partnership (“GP”), Limited Partnership (“LP”), Limited Liability Partnership (“LLP“), Limited Liability Limited Partnership “(“LLLP”) all of which basically flow the same procedures in formation, but diverse in matters of liability, management, and have their advantages and disadvantages as well.

A General Partnership (GP) is a partnership which involves two or more owners carrying out a business purpose. General partners share equal rights and responsibilities in connection with management of the business, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the business' debts and obligations.

There are some advantages and disadvantages of conducting a general partnership. An advantage would be it is simple and inexpensive to create and operate. One tremendous advantage of a general partnership is that you do not have to register with your state and pay a fee. The disadvantage would is doing business as a general partnership all partners are personally liable for business debts and liabilities.

Limited Partnerships (LP) permits each partner to protect his or her personal liability to the amount of his or her business investment. This is not a blanket protection, as at least one partner must accept general partnership status, exposing him/her to full personal liability for the business’ debts and obligations. The general partner would retain the right to control the business, while the limited partner(s) are not engage in any management decisions. Both general and limited partners benefit from business profits.

A plus of a LP is the limited partners have no personal liability for the debts and obligations of the limited partnership. In addition to income tax benefits, limited partnerships are not subject to federal income taxation. A disadvantage would be limited partners may be subject to state income taxation in some states. Another hindrance would be limited partners cannot be involved in the management of the limited partnership. Unlike sole-proprietorships, limited partnerships cannot exist until the proper documentation has been filed at the state level in which ever state the partnership operates.

Limited Liability Partnerships (LLP) similar to a LP, an LLP retains the tax advantages of the general partnership form, but offers some personal liability protection to its partners. Each individual partner in a limited liability partnership is not personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business. Some of the more traditional partnership changes are some state’s department of taxation may subject a limited liability partnership to non-partnership tax rules. IRS views these businesses as partnerships, and allows partners to use the pass through technique. All states require disclosure of the partnership's name and principle place of business, in addition to number of partners and nature of business.

An benefit would be each partner is protect from personal liability for partnership debts and obligations incurred due in part or whole of the wrongdoing of another partner and unlike general partnerships, limited liability partnerships can attract investors who accept no personal liability to become additional limited partners.

Some drawbacks would be lack of continuity, with the death of any of the partners the partnership may discontinue, a partner’s interest is not transferable and there is more legal and organizational expense associated with the formation of a LLP.

Limited Liability Limited Partnership (LLLP) is similar to the other partnerships, except its greatest benefit of is it protects the partners from liability when the partnership is exposed to a lawsuit and provides for asset protection. This occurs when the partners are sued personally; the assets inside the partnership are protected from being taken by the judgment creditor of a partner. An LLLP also provides limited liability for the general partners of the limited liability limited partnership, unlike a LP or LLP, where the general partners are solely liable for all obligations of the partnership.

Obvious distinctions of types of partnerships (see below)

General Partnership	Limited Partnership	Limited Liability Partnership	Limited Liability Limited Partnership
No partner is protected from personal liability for partnership debts and obligations.	In most states, limited partners who do not participate in the management of the partnership business are protected from personal liability for partnership debts and obligations. In some states, limited partners are protected from personal liability even if they do participate in the management of the partnership business.	In Partial Shield Statute states each partner is protected from personal liability only for partnership debts and obligations incurred due to the wrongdoing of other partners. In Full Shield Statute states each partner is protected from personal liability for all partnership debits and obligations, unless the partnership obligation was incurred due to his or her wrongdoing.	Both limited and general partners are protected from personal liability for partnership debts and obligations unless the obligation was incurred due to a partner’s own wrongdoing. Limited partners may be allowed to participate in the management of the partnership business in some states.

In closing in the last couple of decades or so there has been a new form of partnership. This partnership style is referred to as Family Limited Partnership (FLP). A FLP is a new form of limited partnership which serves more as a wealth transfer strategy than a business structure. FLP allows individuals to transfer personal or business assets into a partnership. Then, they can grant limited ownership interests to their children or other family members. In doing so it lowers the family’s estate's taxable value, and safeguards certain if not all assets remain in the family. A FLP can be transferred from generation to generation at a lower estate taxation rate than would be applied to the other types of partnerships.

“Knock-Knock, Who's there...? Power of Attorney!!

A common mistake people unknowingly make has always been considering a Power of Attorney as an individual, and not a document, legal instrument or verbal agreement.  Today, I will play the role of a White Knight and save thy self from further mortification and warn you of the repeated error a great few of people, whether lay-men or professional.  

A Power of Attorney is a document containing an authorization for one to act as an Agent of the Principal which terminates upon death and/or terms set and agreed to by both Agent and Principal. 

For instance, you may own a business, or due to your schedule or are unable to attend industry functions, meetings and/or fulfill fiduciary obligations, whether to make decisions, sign documents or purchases.  In this case in point, you may choose to grant an Agent or Agency, Power of Attorney.  The Agent and/or Agency will implement the duties you would perform if you were present, of course, within the boundaries of the established legally binding terms of the Power of Attorney, if applicable.

 

Regarding an Agent/Agency, the most common terminology in referring to a person in said capacity would be Attorney-in-Fact, not to be confused with Attorney-at-Law. As stated above, an Attorney-in-Fact is authorized by Power of Attorney to act on the authorizer's behalf, in this case the Principal, for all matters outside a court of law.   Attorney-in-Fact functions under the terms of the Power of Attorney and are not restricted, can represent the Principal in any transaction unless otherwise stated and expressed verbally or in a written agreement known as a Special/Limited Power of Attorney, again the Attorney-in-Fact is limited to matters outside a court of law.  A Special/Limited Power of Attorney is when an Agent/Agency is acting in a restricted capacity.  This document will specify the manner and situation in which an Attorney-in-Fact can represent the Principal. 

An Attorney-at-Law should never be confused with an Attorney-in-Fact.  An Attorney-at-Law is a person admitted to practice law in at least one jurisdiction and sanctioned to fulfill criminal and civil legal functions on behalf of clients. Wherein an Attorney-in-Fact is not authorized to practice law or provide legal advice and in many jurisdictions may and will be punished for carrying out such acts. 

In closing, a Power of Attorney is a valuable instrument for persons with extremely eventful lives or in ailing health.  Albeit, when used properly can place ease of multi-tasking abilities for the Principal, but in the same breath can be financial, emotionally and physically detrimental.  For a quick information sessionl, see the video below.