To Incorporate or Not to Incorporate:
The Pros and Cons of Different Business Entities (Part II of II)
It’s important to take the time to consider which business entity best matches your particular business situation. Last week we talked about the importance of looking at limited liability entities when considering your liability, your creditors’ access to your assets, and your tax obligations. We looked specifically at C and S-Corporations and how they might benefit you and your business. This week we’ll look at limited partnerships (LP’s), family limited partnerships (FLP’s) and limited liability companies (LLC’s).
Limited Partnership (LP or FLP)
Apartnership is a business organization in which two or more persons together own the assets of the organization and share in the organization’s profits. Maybe you and your brothers own the business, or perhpas you’ve decided to partner with two or more good friends who also do accounting and bookkeeping. In a general partnership, all partners are equally and personally liable for all business debts and liabilities. In a limited partnership, however, limited partners are not liable for business debts. A limited partnership is a partnership comprised of at least on general partner and one or more limited partners.
A limited partnership with family members as partners is often call a “Family Limited Partnership” or FLP. The general partner is liable for all business debts. The general partner of a limited partnership generally owns a very small percentage (let’s say 1%) of the partnership assets, but has complete control of the activities of the limited partnership. As you can see, while a limited partnership provides limited liability for the limited partners, the general partner will always have unlimited personal liability.
- Pros –
- Limited liability for limited partners.
- The partnership is not taxed; profits and losses “flow through” to the partners, and each must report their income on Form K-1.
- Flexible asset protection.
- Cons –
- Filing an FLP is more expensive than filing a general partnership.
- Limited partners are not allowed to participate in the management of the limited partnership.
- The general partner remains personally liable for the obligations of the limited partnership.
Limited Liability Company (LLC)
An LLC has some of the characteristics of a corporation (enjoying limited liability) and some of the characteristics of a partnership (pass-through taxation). One or more persons form and own the LLC, becoming its “members.” They can either manage the LLC themselves, or hire managers to oversee day-to-day operations. One person can create an LLC, although it will be taxed as a sole proprietorship. However, you can still enjoy the benefits of a limited liability.
- Pros –
- Limited liability.
- Fewer formailities are required.
- The partnership is not taxed; profits and losses “flow through” to the partners and each must report their income from Form K-1 on their IRS Form 1040.
- Depending on the state, an LLC can be formed by one member.
- Cons –
- Possible dissolution of company due to a partner’s death, retirement or bankruptcy.
- It’s more expensive to file an LLC than a general partnership.
Any of these business entities are fairly easy to establish, but requirements vary state to state; visit your local state website (Department of Commerce) to see what you need to do. The most important part of the process is determining which entity is best for you. After that, the rest is business as usual.
If you are considering taking the next step in the process of your bookkeeping or accounting business you have found the source that you need to have to not only gain the training crucial to accounting success, but also the training that will help you find how to grow your business. Don’t leave anything to chance by going anywhere else than Universal.
For over 25 years, Universal Accounting Center has helped people like you start their own accounting and tax practices. We recognize that 85% of the accounting opportunities are with small business so our curriculum is designed to help you learn small business accounting. Think back to our recommendation to increase your income by performing new services for new clients. When you learn small business accoutning you suddenly make yourself available to new clients whil increasing the number of services you can perform. Become a Professional Bookkeeper today.