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What Structure of Business is right for you? Part 2

Writer's picture: Alysa S. EspinosaAlysa S. Espinosa

Updated: Aug 29, 2019

Limited Partnership and C-Corp



Hmmm....Limited Partnership, C-Corp or Twitter?

Limited Partnership


A limited partnership, like a general partnership involves several people operating a business for the purpose of realizing a profit. However, unlike a general partnership, all partners are not equal, or share in the management of the business. Through a combination of a general partners and limited partners the limited partnership is formed. A limited partner invests money or capital into a partnership with the notion that a profit will be realized for the investment. Their risk is limited to their capital contribution.

Liability

The general partner is liable for all business debt, legal action and has his personal assets exposed whereas the limited partner is not, in fact the only liability or risk he has is the possibility of losing his investment. He is like a shareholder in a corporation, only liable for his investment with no personal asset exposure.

Income taxes

The partnership is not taxed, only the individual partners, no double taxation. However, annually the partnership must file an information request with the IRS detailing profit to shareholders.

Longevity or continuation of the business

If a limited partnership agreement allows for transfer of the actual partnership then a limited partner may sell the value to another individual, and that individual may indeed become a limited partner. However the limited partner would always be able to exercise their right to sell or transfer the value to another party. This value may be in the form of profit distribution. Interestingly a limited partner is not beholden to the comings and goings of general partners and stays a limited partner indefinitely.

Control

Unless stipulated in writing limited partners do not manage the business, but rely on the good management skills of the general partners. In the case of several limited partners some agreements allow for the removal of general partners by majority vote of the limited partners.

Location

A limited partnership can operate in multiple states but must register with the designated state.


C-Corporation


C -Corporations are business created by the law, and set up as entirely separate entity. The shareholders are the owners of the business. A C-Corporation is legally recognized by the

law as a “separate person” and has the rights of equal protection under the law. Stock is issued to attract investors and raise capital.

Liability

The corporation itself is liable and must have sufficient capital to cover any obligations that result from legal obligations. Managers and investors are not liable for the debts of the corporation. There is no personal liability for shareholders. If corporate malfeasance is suspected the law has the right to “pierce the corporate veil” a process where the law can assess personal liability to shareholders and officers of the corporation.

Income taxes

Corporations are subject to double taxation. First the corporation itself is taxed, then any dividends paid to shareholders are taxed at a dividend rate.

Longevity or Continuity of the organization

Corporations may operate perpetually with or without the existence of its founders.

Control

Governed by the corporation’s charter called “the articles of incorporation”. Shareholders elect corporate officers (President, Vice President, Secretary and Treasurer) to manage the corporation. There is no limit to the amount of shareholders and they may be of foreign nationality. Annual shareholder meetings are required as are a formal set of by-laws.

Profit retention

Profits are retained by the Corporation itself. The corporation then pays salaries etc., to employees and officers. Shareholders receive a dividend based on held shares and the financial health of the corporation.

Location

If a corporation wishes to operate outside of the state of incorporation, it must register as a foreign business entity, and must foreign qualify in the state(s) it wishes to operate.


Next up...we will conclude with a S-corporation and a LLC.



Call us at 805 231 7990 or email at alysa.espinosa@booksinbloomaccounting.com

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