Starting a new business in Washington, or re-structuring an existing one, is an exciting process. But choosing the right entity for your operations may seem a bit daunting. There are five common business entities in Washington. The “right” choice for you will depend on your particular interests and needs. Let’s take a quick look at the five.
1. Sole Proprietorships
These are businesses owned by a single person or often a married couple. The owner is personally responsible for all business debts and for federal taxes. Forming a sole proprietorship is rather inexpensive, and unlike other types of entities, there are no reporting requirements.
2. General Partnerships
A general partnership is composed of two or more persons (usually not a married couple). The “persons” are referred to as partners and they agree to contribute money, labor, and/or skill to the business. Each partner shares the profits, losses, and management of the business and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement.
With regards to federal taxes, the business is required to file a partnership return. Any income or loss goes to each partner based on how much of the business that partner owns.
3. Limited Partnerships
A limited partnership is composed of one or more general partners and one or more limited partners. The general partners manage the entity and share fully in its profits and losses. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners usually don’t have a say in the daily operations of the business.
A limited partnership may opt to become a limited liability limited partnership by including a statement to that effect in its certificate of limited partnership. Status as a limited liability limited partnership provides general partners with a shield from liability for obligations of the limited liability limited partnership.
4. Limited Liability Companies
A limited liability company is commonly referred to as an “LLC.” An LLC is formed by one or more individuals or entities through a special written agreement known as an Operating Agreement. The agreement details the organization of the LLC, including:
- provisions for management,
- assignability of interests, and
- distribution of profits or losses.
LLCs have limited legal liability like corporations but have fewer governance requirements.
With regards to federal taxes, LLCs are typically treated like sole proprietorships if there is one owner, or like a partnership if there is more than one owner. But if members file an entity classification election form with the IRS, the IRS will treat the LLC like a corporation for tax purposes.
Generally, corporations are more complex than other business entity. As with LLCs, they have limited legal liability. People form a corporation by filing with the Washington Secretary of State and creating a set of bylaws. Creating a corporation also involves other requirements, like:
- Issuing stock certificates,
- Holding annual meetings, and
- Electing directors.
Corporations file federal corporate tax returns with the IRS. These entities can choose a “pass-through taxation,” where income taxes are paid by the owners but not also by the corporation.
Contact The McWilliams Law Group for Help
When you are ready to open a new business or take your current business to the next level, the lawyers at The McWilliams Law Group are here to help. We can help ensure that your operations provide you with the tax and liability protections that best fit your short- and long-term plans. Our attorneys work closely with business owners throughout Washington, providing individualized and strategic advice to help their businesses run smoothly. Contact us now and get the skilled business advice that you deserve.