What Type of Business Entity is Best for Your Small Business?
By Stuart J. Oberman

There was a time when choosing how to do business was easy. Today, there are enough choices [general partnership, limited partnership, limited liability company, limited liability partnership, business trust, and of course, the old reliable corporation] to give a person a headache just thinking about it. Let’s review these entities so that you can choose which entity may be right for you.

General Partnership: In my humble opinion, it’s a poor decision to go into business as a general partnership. In a general partnership, all of the partners are jointly (together) and severally (individually) liable for all actions of the partnership.

The general partnership, more than any other type of entity calls for a great deal of trust between partners. While it is true that a person should not go into business with someone they do not trust, unfortunately, people do it all the time and end up regretting it.

In a general partnership, all partners are individually liable for any wrongs that may be committed by the partnership. If a judgment is entered against the partnership, a creditor may go after not only partnership assets, but also personal assets (houses, savings, cars, etc.) of the individual partners.

Limited Partnership: One way to organize a business is to establish a limited partnership. A limited partnership has one or more general partners, and a number of limited partners. The general partners are usually the main players in the partnership and the limited partners are primarily just investors. General partners still have unlimited liability, but the limited partners are liable only to the extent of their investment. These kinds of partnerships are usually set up for real estate investments. The problem is that there is still unlimited liability for the general partners.

S Corporations (Sub-chapter "S"): In my opinion the best way to limit a business owners personal liability is to incorporate. One way to reap the benefits of incorporating is for a business owner to elect to become a sub-chapter "S" corporation. An "S" corporation gives a business owner pass-through income and liability protection (unlike partnerships). I would seriously recommend that a small business owner consider incorporating before they set up any other type of business entity.

Limited Liability Company (LLC): With a limited liability company, a company may be able to have an unlimited number of members. Members potentially are protected [in theory] from personal liability. The LLC can elect to file a tax return as a C corporation or a partnership.

Limited Liability Partnership: A limited liability partnership, or the LLP, falls somewhere between the general partnership and an LLC. The LLP does not protect business or personal assets from liability. However, the LLP may give protection from potential liability that may arise from the wrongful acts of a partner [in the partnership]. This is important because in a general partnership, if one partner commits a wrongful act, then all of the partners may be held liable.

Professional Corporation: A Professional Corporation is very similar to a traditional corporation. Like a traditional corporation, a Professional corporation can provide a solid layer of insulation from the liability of others. Also, a Professional Corporation can be structured in a way that takes advantage of many of the tax benefits available to corporations.

In a Professional Corporation, typically at lease one member of the Board of Directors and the President of a Professional Corporation must be licensed to practice Dentistry. The member of the Board of Directors and the President can also be the same person. The best practice in a Professional Corporation is to have every member of the Board licensed to practice dentistry.

There are many factors to consider when starting a business. Before you consider which entity to form, I recommend that you seek professional advice from your accountant (CPA) and attorney.