Starting a Business: Step 2

Types of Business Entities

The structure your business assumes is important in determining your limitations and liabilities. Depending on the type of structure you choose, additional paperwork may be necessary to establish your business in New Hampshire. Your accountant or attorney can help you decide what type of business structure best fits your needs.

  • Sole Proprietorship: A sole proprietorship is the form of business entity with the least amount of legal formalities. In a proprietorship, the owner assumes sole responsibility for the operations and finances of the business, including profit and loss. In the proprietorship form of business entity, the owner’s personal property is tied directly to the business; therefore, the owner assumes unlimited risk of his personal assets.

  • “C” Corporation: Corporations are a separate entity from its owners. Corporations provide the shareholders with the most protection from liability and responsibility from debts and contracts.Profits for a corporation are taxed at the corporate level when the income is earned and is also taxed at the individual shareholder level.

  • “S” Corporation: An “S” Corporation is similar to a corporation in that it provides its shareholders with protection from liability. However, unlike a corporation, an “S” corporation is exempt from federal income tax. Instead the taxes are paid solely by the individual shareholders.

  • General Partnership: General Partnerships require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay tax, but must file an informational return, while individual partners report their share of profits and losses on their personal return. Short term partnerships are also known as joint ventures.

  • Limited Partnership: A limited partnership is a form of business organization that offers some of the partner’s limited liability. It consists of a general partner who organizes and manages the partnership and its operations, and limited partners who contribute capital but have limited liability and assume no active role in day-to-day business affairs.

  • Limited Liability Partnership: LLP’s are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLP’s are not recognized by every state and those that do, sometimes limit LLP’s to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns. Check with your Secretary of State’s office to see if your state recognizes LLP’s and if so, which occupations qualify.

  • Limited Liability Company: A Limited Liability Company (LLC) is a combination of the corporate and partnership forms of business. In an LLC, parties control shares of the company and like corporations, and their liability for the operations of the company is determined by their level of investment. However, like partnerships, income tax is not paid at the LLC level, but rather it is “passed through” and taxed at the shareholder level. This somewhat complicated form of business entity should be discussed further with an attorney or accountant to determine if it will fit your needs.

 

Each of the above has legal, tax, and practical consequences that may require the advice of an attorney and/or CPA. You may contact the NH Bar Association website or call them at 603-224-6942 for a listing of attorneys.