withdrawal of partners or the admission of new partners ... · PDF filepartnership to the...
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Generally speaking, there are three basic types of legal entities in which business can be conducted: (1) sole proprietorship, (2) partnership, and (3) corporation. Within each category, there are several variations. Determining which form is best for a particular commercial enterprise depends on a variety of considerations, including the number of owners, acceptable liability of owners, tax treatment, transferability of ownership interests, set-up costs, and other factors. Sole Proprietorship . This is a form of business involving one and only one owner. No special legal documents are needed to establish a sole proprietorship and really it is not even a distinct legal entity, separate from its owner. As a result, the owner is liable for all of the debts and liabilities of the business, but has total control of the business. If the business is to be conducted under a name, it is necessary to file an assumed name certificate (sometimes referred to as a “dba”) in any county in which the business is to be conducted. The business does not file a separate tax return, although the owner must prepare a Schedule C to be included in his or her individual tax return. While the assets of a sole proprietorship (including its name) can be sold, it is not possible to transfer a sole proprietorship to someone else. Partnership . A partnerships is a form of business entity involving two or more owners. A partnership is not taxed as a separate entity (though it does file an “informational” tax return) and all profits and losses “flow through” from the partnership to the individual partners and must be included in the individual owners’ returns. There are several types of partnerships: general partnership, limited partnership (Ltd.), joint venture, and limited liability partnership (L.L.P.) are the most common. A general partnership is, in many respects, similar to a sole proprietorship except that it involves more than one owner. All partners are liable for the debts and liabilities of the partnership and, ordinarily, all partners are able to bind the partnership. Unless they agree otherwise, all partners have equal management rights. Generally speaking, changing partners, or the death of a partner, dissolves a general partnership, so general partnership interests are not readily transferrable (though there are ways to minimize the disruptive effects of this aspect of a general partnership). A joint venture is a special kind of general partnership formed to pursue a single business project (for example, development of an apartment project) and once that undertake is finished, the venture is dissolved. A limited partnership is a partnership composed of one or more general partners and one or more limited partners. The general partners have unlimited liability for the debts and liabilities of the partnership, but so long as they remain passive investors and do not participate actively in the operations of the business , limited partners are liable for the partnership’s debts only to the extent of their investment. Limited partnership interests can be transferred and general partners can be replaced, provided the partnership documents so allow, so there is greater transferability of interest in a limited partnership. A limited liability partnership is a form of partnership typically employed by professionals (such as lawyers or accountants). In this form of partnership, the partners have unlimited liability for their own acts, but not for the debts of the partnership nor for the liabilities of the other partners (except to the extent of their interest in the partnership). Limited liability partnerships can have provisions for the withdrawal of partners or the admission of new partners without affecting the existence of the partnership. Limited liability partnerships and limited partnerships require filing of forms with the state to create. It is strongly recommended that a lawyer draft a Partnership Agreement for the partnership, regardless of which kind of partnership is chosen, since the parties need to agree in advance on may things, such as management responsibilities and rights, distribution of profits, responsibility for providing additional money to the business (if needed), what should happen upon the death or withdrawal of a partner, and a number of other issues. Corporation . A corporation is a separate legal entity owned by its shareholders, managed by a board of directors , and operated by its officers . Establishment of a corporation requires preparation and filing of Articles of Incorporation and submission of information to various government offices. If legal formalities are followed , the owners are not liable for the debts or liabilities of the corporation. Further, shares of stock of a corporation may be freely transferred (bought and sold) (subject to applicable state or federal securities laws and regulations). Unlike partnerships and sole proprietorships, corporations are subject to Texas franchise taxes. There are several different kinds of corporations, including C Corporations, S Corporations, Close Corporations, Professional Corporations (P.C.), Professional Associations (P.A.), and Limited Liability Companies (L.L.C.). A C corporation is taxed separately from its owners. This can lead to “double taxation” because the profits are taxed first to the
Transcript of withdrawal of partners or the admission of new partners ... · PDF filepartnership to the...
Generally speaking, there are three basictypes of legal entities in which business can beconducted: (1) sole proprietorship, (2)partnership, and (3) corporation. Within eachcategory, there are several variations.Determining which form is best for a particularcommercial enterprise depends on a variety ofconsiderations, including the number of owners,acceptable liability of owners, tax treatment,transferability of ownership interests, set-upcosts, and other factors.
Sole Proprietorship. This is a form ofbusiness involving one and only one owner. Nospecial legal documents are needed to establish asole proprietorship and really it is not even adistinct legal entity, separate from its owner. Asa result, the owner is liable for all of the debtsand liabilities of the business, but has totalcontrol of the business. If the business is to beconducted under a name, it is necessary to file anassumed name certificate (sometimes referred toas a “dba”) in any county in which the business isto be conducted. The business does not file aseparate tax return, although the owner mustprepare a Schedule C to be included in his or herindividual tax return. While the assets of a soleproprietorship (including its name) can be sold,it is not possible to transfer a sole proprietorshipto someone else.
Partnership. A partnerships is a form ofbusiness entity involving two or more owners. Apartnership is not taxed as a separate entity(though it does file an “informational” tax return)and all profits and losses “flow through” from thepartnership to the individual partners and must beincluded in the individual owners’ returns. Thereare several types of partnerships: generalpartnership, limited partnership (Ltd.), jointventure, and limited liability partnership (L.L.P.)are the most common. A general partnership is,
in many respects, similar to a sole proprietorshipexcept that it involves more than one owner. Allpartners are liable for the debts and liabilities ofthe partnership and, ordinarily, all partners areable to bind the partnership. Unless they agreeotherwise, all partners have equal managementrights. Generally speaking, changing partners, orthe death of a partner, dissolves a generalpartnership, so general partnership interests arenot readily transferrable (though there are waysto minimize the disruptive effects of this aspectof a general partnership). A joint venture is aspecial kind of general partnership formed topursue a single business project (for example,development of an apartment project) and oncethat undertake is finished, the venture isdissolved.
A limited partnership is a partnershipcomposed of one or more general partners andone or more limited partners. The generalpartners have unlimited liability for the debts andliabilities of the partnership, but so long as they
remain passive investors and do not participateactively in the operations of the business, limitedpartners are liable for the partnership’s debts onlyto the extent of their investment. Limitedpartnership interests can be transferred andgeneral partners can be replaced, provided thepartnership documents so allow, so there isgreater transferability of interest in a limitedpartnership.
A limited liability partnership is a formof partnership typically employed byprofessionals (such as lawyers or accountants). Inthis form of partnership, the partners haveunlimited liability for their own acts, but not forthe debts of the partnership nor for the liabilitiesof the other partners (except to the extent of theirinterest in the partnership). Limited liabilitypartnerships can have provisions for the
withdrawal of partners or the admission of newpartners without affecting the existence of thepartnership.
Limited liability partnerships and limitedpartnerships require filing of forms with the stateto create. It is strongly recommended that alawyer draft a Partnership Agreement for thepartnership, regardless of which kind ofpartnership is chosen, since the parties need toagree in advance on may things, such asmanagement responsibilities and rights,distribution of profits, responsibility forproviding additional money to the business (ifneeded), what should happen upon the death orwithdrawal of a partner, and a number of otherissues.
Corporation. A corporation is a separatelegal entity owned by its shareholders, managedby a board of directors, and operated by itsofficers. Establishment of a corporation requirespreparation and filing of Articles of Incorporationand submission of information to variousgovernment offices. If legal formalities arefollowed, the owners are not liable for the debtsor liabilities of the corporation. Further, shares ofstock of a corporation may be freely transferred(bought and sold) (subject to applicable state orfederal securities laws and regulations). Unlikepartnerships and sole proprietorships,corporations are subject to Texas franchise taxes.There are several different kinds of corporations,including C Corporations, S Corporations, CloseCorporations, Professional Corporations (P.C.),Professional Associations (P.A.), and LimitedLiability Companies (L.L.C.).
A C corporation is taxed separately fromits owners. This can lead to “double taxation”because the profits are taxed first to the
corporation and then, if they are distributed to theshareholders (as dividends), taxed again. An Scorporation is, essentially, a corporation taxed asif it were a partnership. That is, the profits andlosses flow through to its owners rather thanbeing separately taxed in the corporation. Thereare limitations as to the number and kinds ofowners an S Corporation may have. A closecorporation is a type of corporation designed forsmaller companies, owned by a relatively fewnumber of shareholders. In a closed corporation,the shareholders manage the corporation withouta board of directors or officers, simplifying legalrequirements. Professional corporations andprofessional associations are corporationsestablished for professionals (such as doctors orlawyers) to take advantage of certain taxopportunities available to corporations, withoutcreating limited liability for professionalmisconduct (prohibited by state law for suchindividuals). A limited liability company is reallynot a corporation at all, but a special entity whichprovides limited liability to its owners, freetransferability of interests, but tax attributes of apartnership (that is, pass through of taxability ofprofits and losses to the owners and no taxationof distributions (dividends)).
There are a number of other types ofbusiness entities (such as foundations,associations, trusts, and non-profit corporations)but the forms above listed are the most commonones for most new and start-up businesses.
At the outset, it is a good idea todiscuss the best form of business entity with anexperienced attorney and an accountant sothat the advantages and disadvantages of allforms can be explored, explained, anddiscussed and the business can be set upproperly and optimally from the start.
Prepared and distributed by:
Thomas B. Andersen*
WILLIAMS, BIRNBERG & ANDERSEN, L.L.P.
2000 Bering, Suite 909
Houston, Texas 77057
(713) 981-9595
www.wba-law.com
The purpose of this publication is to provide
information of a general character only. It does not
constitute legal advice. An attorney should be
consulted before reliance is made on any statement
contained in this brochure.
*Board certified, Commercial Real Estate Law, Texas
Board of Legal Specialization.
Prepared and distributed by:
WILLIAM S, BIRNBER G & ANDER SEN , L.L.P.
2000 Bering, Suite 909
Houston, Texas 77057
(713) 981-9595
www.wba-law.com
wba@ wba-law.com
