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.
Corporations
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.