Sole Proprietor, Partnership, Corporation or LLC?
Published 08/15/06

Your business needs and desires should be analyzed with your attorney and accountant to determine what type of business structure is best for your company. Considerations include the number and type of owners, management style, taxes and type of business. There are advantages and disadvantages to any choice that also need to be considered. Under New Hampshire law, business owners have several choices with regard to which business structure to choose.

SOLE PROPRIETOR

The sole proprietorship is by far the simplest and most common business structure. It is an unincorporated business with one owner that is very easy to set up and maintain. There is no requirement to register with the State in order to establish a sole proprietorship. A sole proprietorship can be operated under the owner's name or under a registered trade name. If business is conducted under a trade name, a name that is not your own, New Hampshire requires the trade name be registered with the Secretary of State.

The advantages to operating as a sole proprietor are (i) the ease of set up and maintenance - there are no formalities required to operate it, no filing fees (except in the case of a trade name), and no organizational paperwork; (ii) no double taxation -any income earned by you as the sole proprietor is reported on your individual tax return; and (iii) any deductions are limited to total income earned.

The primary disadvantage to operating a business under a sole proprietorship is there is no liability shield, meaning, the owner is personally liable for any obligations of the business. Also, the business ends with the death of the sole proprietor.

PARTNERSHIP

A partnership requires at least two owners. There are two different types of partnerships: General and Limited.

A general partnership is similar to a sole proprietorship with more than one owner. There are no formal requirements to form a general partnership, therefore, it is easy and inexpensive to form a general partnership. Like a sole proprietorship, there is no liability shield protecting the partners personally from the partnership's obligations. In addition, each general partner has the authority to bind the partnership, therefore one partner could expose the other to substantial personal liability.

There is no requirement for a partnership to have a written partnership agreement outlining how the partnership should be run, however, it is a good idea to have such an agreement adopted. It is important for all parties to understand what their rights and responsibilities are as partners and establish guidelines and expectations in the event the partnership dissolves. Additionally, the partnership agreement outlines how profits are distributed. If there is no agreement, there is a statute that makes these types of decisions for you, whether you ultimately like it or not.

Partnerships report income on a partnership tax return, but do not pay income tax. The income passes through to the partners themselves who are responsible for paying any income tax.

The primary disadvantage to operating as a partnership is that if one partner leaves or dies, the partnership dissolves. The partnership would need to wrap up its business, fulfill all outstanding obligations and satisfy all debts and distribute any remaining profits to the partners.

A limited partnership is more complex than a general partnership, and, as such, requires more to establish. A limited partnership has two types of partners, limited and general. The general partner manages the daily operations and is personally liable for partnership obligations, whereas the limited partner contributes capital, but is otherwise passive. The limited partner's liability exposure is no more than his or her initial investment in the partnership.

Limited partnerships require careful management to ensure the limited partner does not cross over and act more like a general partner thereby losing his or her liability protection. Limited partnerships are also required to register with the Secretary of State and pay an annual registration fee.

CORPORATION

A corporation is a separate entity from the owners. As such, the owners' liability for corporate obligations is limited to their investment.

The main advantage to forming a corporation is the liability shield. The owners' personal assets are protected from the corporation's creditors. Only business assets can be used to satisfy business debts. This liability protection is not absolute, however, and does not protect against creditors seeking satisfaction of a personal guaranty, fraudulent acts or if the corporation is merely a shell for personal dealings. Also, you remain liable for your own negligence or intentional wrongful acts, such as hitting a pedestrian in a crosswalk while driving on company business or physically assaulting a customer.

The formation of a corporation is involved. Articles of organization must be filed with the Secretary of State along with a filing fee. The articles outline basic information such as who the incorporators are, the name and address of the company, and the number of shares the company will issue. Additionally, by-laws outlining how the corporation will be run must be drafted and adopted. The by-laws are not required to be filed with the State, however, they are extremely important to have in order to maintain corporate status. Shareholder agreements are also prudent when there are two or more shareholders.

Maintaining corporate status is important and requires following certain formalities. Under New Hampshire law, corporations must hold annual shareholder meetings, keep minutes of the meetings and maintain detailed financial records for the corporation. The corporation must also file an annual report and fee with the Secretary of State.

Under federal tax law, there are two primary forms of corporations: C Corporations and S Corporations. C corporations are taxed at the corporate level and any distributions to shareholders are taxed again at the individual shareholder's level. S corporations, which have certain limitations as to who can be a shareholder and the number of shareholders, are taxed like a partnership. The S corporation passes income through to the shareholders who report the income on their individual tax return.

LIMITED LIABILITY COMPANY

The Limited Liability Company, known as the LLC, is a hybrid form. There is no limit to the number or type of owners of an LLC. The LLC melds the advantages of the ease of governing a sole proprietorship or partnership with the liability protection offered by a corporation.

In New Hampshire , an LLC is formed when the Certificate of Formation is filed with the Secretary of State. The Certificate outlines the name and address of the LLC and lists at least one owner. The LLC must file an annual report with the Secretary of State.

The LLC is taxed like a sole proprietorship or partnership thereby eliminating the double taxation of a C Corporation. The income is passed through to the owner and reported on their individual tax return. Like a corporation, the LLC offers its owners protection from the company's obligations.

An LLC with more than one member should have an operating agreement outlining how the LLC will be governed and how profits will be distributed. Absent an operating agreement, there is a statute that will make these decisions for you by default. There is no requirement under New Hampshire law to hold annual meetings or maintain detailed minutes, however, it is still advisable to do so. This makes the LLC an attractive option for many small businesses.

The attorney who wrote this article is no longer at the law firm of Hamblett & Kerrigan, P.A. in Nashua. Other practitioners at the firm handle work in the same areas of law which she worked in, which included employment law, family law, and general litigation, including property tax abatement and personal injury. You can reach one of those lawyers by calling the law firm (883-5501) or by e-mail at info@nashualaw.com .

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.