How to Choose a Right Legal Structure for Your Company

By: Henry Apruk

In finding the right business registration company for your business, it is important that you know your chosen company’s structure. Being blind to these things will mean the difference between a smooth sailing company and one that will stagger with each endeavor.

1. Limited Partnership (LP)

A separate legal entity, this type of business includes a general partner and one or more limited partners who invest capital into the partnership, but do not take part in the daily operation or management of the business.

The limited partners limit their amount of liability to the amount of capital invested in the partnership. The general partner shoulders the personal liability for the debts and obligations of the partnership.

Business operations are governed, unless otherwise specified in a written agreement, by majority vote of voting partners. LPs are legal entities formed with the Connecticut Secretary of the State.

Advantages:

LPs provide a legal structure to the establishment of the business. From a capital investment standpoint, limited partners are shielded from the liability in that their liability is dependent upon the amount of capital invested.

In addition, dividends distributed to all partners are reported on the partners' personal income tax return. There are no restrictions as to the amount of dividends that the general partners may receive from the business.

General partners of a LP may be in the form of another person or company. As a separate legal entity, LP's may own property, sue, and be sued in LP's name.

Disadvantages:

In a LP there must be at least one general partner and it is the general partner(s) that incur unlimited liability.

As in any partnership, a LP must draft a partnership agreement, which governs how the business is operated. In a LP the partnership agreement must state a date of termination.

Since a LP is a legal entity, the formation of a LP requires more legal documentation than in a general partnership.

2. Limited Liability Partnership (LLP)

A separate legal entity, an LLP provides liability protection for all general partners as well as management rights in the business.
Most commonly used in professional practices, an LLP offers, in most cases, the same limited liability enjoyed by a corporation, but at the same time it is a flow-through entity for federal and Connecticut tax purposes, just like a partnership. LLP’s are legal entities formed with the Connecticut Secretary of the State.

Advantages:

LLP’s provide a legal structure to the establishment of the business. From a capital investment standpoint, limited partners are shielded from the liability in that their liability is dependent upon the amount of capital invested. In addition, dividends distributed to all partners are reported on the partners’ personal income tax return.

As in any partnership, a LLP must draft a partnership agreement, which governs how the business is operated. There is no requirement to set a termination date of the partnership agreement.

As a separate legal entity, LLP’s may own property, sue, and be sued in LLP’s name.

Disadvantages:

Since a LLP is a legal entity; the formation requires more legal documentation than in a general partnership.

If a LLP drops or loses a partner, the business is automatically deemed dissolved.

2. Limited Liability Company (LLC)

A separate legal entity, the LLC is a hybrid between a partnership and a corporation, combining the limited liability advantage of a corporation with the tax status of a sole proprietor or partnership. Owners of the LLC are called members.

Advantages:
Similar to the partnership entities, the LLC is governed by an operating agreement, or in the absence of one, by the Connecticut Limited Liability Company Act. One or more members may form the LLC.

As a separate legal entity, LLC's may own property, sue, and be sued in LLC's name.
Managers of an LLC as elected by the members may be in the form of a person or other entity.
Unless otherwise specified by the Articles of Organization, LLC's enjoy perpetual continuity similarly to a corporation.

Disadvantages:

Since a LLC is a legal entity; the formation of a LLC requires more legal documentation than in a general partnership or sole proprietorship.

3. Corporation

This state chartered organization acts as a separate legal entity and is the most structured business entity. Business activities are restricted to those listed in the corporate charter. Corporations may elect to file as a C-Corporation or S-Corporation. The differences are defined by the tax filing status as determined by the chapters in the Internal Revenue Code.

C-corporations - pay federal and state income taxes on earnings. When the earnings are distributed to the shareholders as dividends, the earnings are taxed again. Double taxation is a big drawback of C-corporations.

S-corporations - have the same legal attributes as the C-corporation, however, the corporation does not pay income taxes on earnings, rather, the shareholder pays income tax on dividends on their personal income tax return.

Advantages:

Liability is limited to the amount that owners have paid into their share of stock and the corporation's continuity is unaffected by the death or transfer of shares by any of the owners.

Corporations have perpetual continuity unless otherwise specified in a Certificate of Incorporation. As a separate legal entity, corporations may own property, sue and be sued in corporate name.

Disadvantages:

Extensive record keeping, close regulation and double taxations (taxes on profits and taxes on dividends paid to the owners).