Wednesday, August 3, 2016

The ABC’s of Kentucky Business Entities

Clients constantly deal with a variety of business forms. Knowing something about business entities can make a difference, whether you are starting a new company or doing business with others. While federal tax issues drive many of the decisions about business forms, you should also know something about how they differ from one another under state law.

Sole Proprietorship

A sole proprietorship is the simplest form of doing business – one person sells a product or provides a service without operating in any particular business form. A sole proprietor is a person that works for himself or herself (i.e., a lawyer, accountant, doctor, freelance photographer, carpenter, etc.), and hasn’t applied to the Kentucky Secretary of State to operate as a particular business form. A sole proprietor can be nothing more than a person doing business under a name – Joe’s Auto Glass.

Joint Venture

A joint venture is a common enterprise undertaken for mutual benefit and for a particular transaction. A joint venture is not really a separate business form, but a loose common enterprise for a limited purpose. The individual co-venturers may or may not decide to form a separate business entity to conduct their venture. For example, a nonprofit hospital and a physician group might form a joint venture to purchase a new MRI machine, and agree to share their expenses and revenues for its operation. The hospital and physician group could own the MRI machine in both their names, or they could form a new LLC to own and operate the machine. Either way, it is the limited nature of the common enterprise that defines a joint venture.

General Partnership

A general partnership in its simplest form is much like a sole proprietorship with more than one owner. The partnership is not required to register with the Kentucky Secretary of State unless it uses an assumed name, and might not even have a written agreement among its partners. Unlike sole proprietorships, however, general partnerships are governed by very complex state organizational laws and federal tax laws. The most unique feature of a general partnership is the agency relationship that exists among its owners – each partner is an agent of the partnership for the purpose of its business. An act of a partner for carrying on the partnership’s business in the ordinary course binds the entire partnership, unless the partner had no authority to act for the partnership, and unless the person with whom the partner was dealing knew that the partner lacked authority to act.

Limited Liability Partnership

A limited liability partnership is a general partnership in which the partners have filed a statement of qualification with the Kentucky Secretary of State. The statement of qualification provides partners with partial limited liability while keeping the flexible business structure of a general partnership. In almost every other way, LLPs function as ordinary general partnerships.

Limited Partnership

Limited partnerships are partnerships formed by two or more persons with two separate classes of partners – general partners with full liability and limited partners with limited liability. Before the advent of LLCs, many horse syndications were formed as limited partnerships. A general partner has all the rights, duties, and obligations of a partner in a general partnership. The limited partners, however, do not participate in control or management of the limited partnership, may not contribute services, and have liability only to the extent of their contributions.


A corporation is a legal entity created under the authority of the laws of its state of incorporation, where the ownership shares of the business are held by an individual or a group of individuals, or by an entity or group of entities, or some combination of these. The Kentucky Business Corporation Act vests corporations with “the same power as an individual to do all things necessary or convenient to carry out its business and affairs,” including the ability to “purchase, receive, lease, or otherwise acquire, own, hold, improve, use and otherwise deal with, real or personal property, or any legal or equitable interest in property,” unless otherwise specified by its articles of incorporation. KRS 271B.3-020(1)(d). A typical corporation is made up of shareholders, directors, and officers, each of whom play a different role in owning, supervising, or operating the business of the corporation.

Limited Liability Companies

Limited liability companies are the Swiss army knives of Kentucky business forms. Most closely held companies are now organized as LLCs. Members of LLCs have limited liability from the general business obligations of the company, but typically have liability for their own wrongful actions. LLCs are flexible, and can be organized to operate like other business forms. For example, an LLC can be set up with a board of directors and officers like a corporation, or with general and limited members like a limited partnership.

LLCs come in two main varieties – member-managed and manager-managed. A member-managed LLC operates like a partnership, where all owners vote in proportion to their ownership. A manager-managed LLC operates much like a limited partnership, where the managers exercise control and the members do not participate in management.