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Business Glossary

Business Glossary

Corporations - The corporation is the oldest form of limited liability business entity, and tends to be a more rigid, structured form of business organization than a limited liability company or a limited partnership. In some cases, though, a corporation can gain some of the flexibility commonly found in limited liability companies or limited partnerships through use of a shareholder's agreement. This is usually only appropriate where there are a few shareholders. A corporation is known as a “C-Corp” when it follows ordinary corporate tax structures. It is known as an “S-Corp” when it makes a tax election to be taxed as a partnership.

Limited Liability Company - A limited liability company (LLC) blends some of the best features of a corporation and a partnership. From the corporation it takes its limited liability character and its separate business entity existence. From the partnership it takes the pass-through taxation features offered by the IRS. The LLC also offers organizational flexibility much like a partnership. The members of the company may agree to virtually any structure including the use of officers to govern the day-to-day operations. Those who run the LLC, however, are usually referred to as the managers of the company. Managers generally have the unlimited ability to bind the company, unless that ability is explicitly and publicly limited.

Limited Partnerships - A limited partnership (LP) is formed by filing a certificate of limited partnership with the California Secretary of State. Each LP must have at least one general partner and one limited partner though it may have as many of each as it wishes. The general partner is responsible for the operation and management of the limited partnership. Unlike members in a LLC or shareholders in a corporation, the general partner in a LP retains full liability for the obligations of the LP. Limited partners, on the other hand, are not subject to the liabilities of the LP so long as the limited partners truly do not participate in the day-to-day, ordinary management of the partnership. To the extent a limited partner does participate in the management of the LP, the limited partner could be deemed a general partner and incur the full extent of the limited partnership's liability. Often the general partner in a LP will be a limited liability company or a corporation. This provides the benefits of a LP with a limited liability entity absorbing the liability of the partnership.

The LP possesses the same advantageous pass-through tax treatment as a general partnership, but avoids the California gross receipts tax obligations of a limited liability company. LP’s are most often used where one person or organization will be managing the day-to-day operations of a business and the limited partners seek to merely serve as passive investors.

General Partnerships - General partnerships are the oldest form of business organizations behind only the sole-proprietorships. The general partnership, however, is not a business entity that stands alone from its owners as far as legal liability is concerned. All partners in a general partnership share full responsibility jointly and severally for all of the obligations of the partnership. For tax purposes on the other hand, the partnership is treated separately to the extent that it may file its own tax return. The partnership possesses pass-through taxation, which allows the income, profits and losses to pass through directly to the general partner's personal tax returns. Because of their unlimited general liability, general partnerships are rarely used today.

Sole Proprietorship - A sole proprietorship is a business run by an individual, as an individual. Because this is not distinct from the owner, the owner retains full liability for all obligations of the business, including debt, lawsuits and regulatory compliance obligations. Often, the individual operating the business will do so under a fictitious business name, or "DBA." This does not, however, distinguish the individual from the business for any limitation of liability or other purpose. This form of business is rarely advisable. In certain cases, where threat of a lawsuit is minimal and other obligations are also limited, this method of operation may be appropriate.

S Corporation - A corporation may elect in certain circumstances to be treated for tax purposes as a partnership, which will allow the income and losses to pass through to the shareholders and avoid the double taxation usually found in a corporation. This is referred to as an “S-Election,” which is why this type of corporation is called an “S-Corp.” Among other things a corporation that wishes to make an S-Election, must have 100 or fewer shareholders and meet a number of other requirements.