Types of Entities

December 7th, 2005 Edit

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There are many kinds of entities. Partnerships, corporations and limited liability companies (LLC) are the most common. There are also limited partnerships (LP), limited liability partnerships (LLP, and limited liability limited partnerships (LLLP). Let’s start with the common and work up to more the complex.

But before doing that consider this: is an individual engaged in business on his or her own an entity? Not yet. Lawyers call that person a sole proprietor. Generally, a sole proprietor is liable for contracts entered into and for negligence and other torts commited by the business and employees. So, it’s a not a very sophisticated way to engage in business. But, it’s easy to form a sole proprietorship because it’s automatic when a natural person (a legal term for people) starts his or her own business.

A partnership is generally formed when two or more persons engage in business to share profits and losses. This is a general partnership. The persons can be individuals or entities such as corporations or other partnerships. Like a sole proprietorship, partners are usually liable for the contract debts of the partnership. Also, it’s easy to form a partnership because it’s automatic when two persons go into business and share profits and losses and do not form a corporation, LLC or other type of entity. Even if there is no written partnership agreement. Of course, it’s best to have a written partnership agreement, and they are often complicated to draft because there are so many optional provisions that can be included.

Some states allow or require partnerships to file a partnership registration statement with the state secretary of state or other filing office. Such states often maintain online databases of public records information about partnerships that file annual returns and registration statements. This information might include names of partners, addresses, and sometimes copies of documents.

Some states allow a partnership to file a statement of qualification to elect to have limited liability, so that it then becomes a limited liability partnership or LLP.

A limited partnership is similar to a general partnership but it has two types of partners: general partners and limited partners. The general partners have liability for contract debts of the limited partnership, but the limited partners do not (if the limited partnership and partners comply with the limited partnership law). The limited partnership is usually formed by filing a certificate of limited partnership with the state secretary of state or other filing office. Some states allow a limited partnership to elect limited liability for its general partner by filing a statement of qualification with the state, thus becoming a limited liability limited partnership or LLLP.

Partnerships, limited partnerships, LLPs and LLLPs are burdened with complex income tax codes and accounting methods that often challenge intuition. For that reason, many lawyers and accountants still advise clients to form corporations for their businesses instead of partnerships or limited liability companies (LLC’s usually elect to be taxed the same as partnerships).

A corporation is an entity generally formed by one or more persons filing articles of incorporation with the state secretary of state or other filing office. Most states maintain online databases of public records information about corporations that file annual reports, articles of incorporation, mergers, name changes, and other forms. This information might include names and addresses of officers, directors and registered agents, as well as copies of documents. This information often includes names of presidents, vice presidents, secretaries, treasurers and other officers of corporations.

S corporations are corporations that have filed a form with IRS to elect to be treated as such for tax purposes.

Public corporations are corporations whose shares of stock are held by many people such that they are subject to the Securities Exchange Act. Privately held corporations are the typical corporations of businesses whose stock is not traded publicly.

Of course, it is likely that the ownership interests in all corporations, partnerships, limited liability companies and other entities are securities that are subject to the federal and state securities laws.

Nonprofit corporations are generally formed by three or more persons filing articles of incorporation with the state secretary of state or other filing office. Some states have various categories of nonprofit corporations, such as religious, charitable, benevolent, etc. If the nonprofit corporation requires tax exemption, a separate application for recognition of tax exempt status must be filed with IRS. This makes nonprofit corporations frequently more complicated to form than for profit business corporations. Nonprofit corporations usually appear in state online databases of corporate information.

There are other types of entities, such as business trusts, real estate investment trusts, but they are less common and are usually created by special purpose statutes for specific types of business, government or quasi-government functions. They often do not appear in state online databases of public records information due to their unusual nature.

By the way, this is not legal advice. This is a general background discussion of the types of entities in the US. The specifics vary from state to state because entities are generally created under state law, and each state has its own law, so there are 50 sets of entities laws in the US.

James W. Martin, President
Government Files Online, Inc.
St. Petersburg, Florida
December 7, 2005

Entry Filed under: Corporations & Entities

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