Introduction
One of the first questions most entrepreneurs ask themselves is: Should I incorporate? This question is usually followed by: How can I separate my personal liability from that of my business? To answer these questions, each current, or prospective, business owner must consider his or her goals and exposure to liability. In order to provide you with general information as to what type of entity best fits your needs, we have created this brief overview of some of the business organizations available to prospective business owners in Georgia. Of course, each situation is different. The information below is not legal advice, but instead constitutes a general overview of available options. If you are interested in having a business entity established, Dunlap Gardiner LLP will be happy to assist you. Simply contact our office to set up an appointment.*
Sole Properietorship
A sole proprietorship is simply an individual acting as a business. This form of organization does not require any special paperwork or action and may be appropriate if you are engaging in a simple business. For example, if you are a single person who does minor repairs for neighbors in exchange for payment you are acting as a sole proprietorship. In this form of business you are personally taxed on the income you make and no special record keeping requirements exist. The down side of this form of business ownership is that you will be personally liable for any problems that arise in the course of your business and will not be able to separate your personal assets from that of your business. If you foresee making substantial income from your business, or have substantial risks associated with your business, this type of organization may not be right for you. However, if you do not intend to hire employees and simply intend to make money “on the side” a sole proprietorship could be appropriate for you.
General Partnership
A general partnership operates in substantially the same manner as a sole-proprietorship. Of course, the chief difference is that a partnership is two or more people conducting a business for profit. [1] Each member of a partnership is taxed in his individual capacity based on his or her receipt of the partnerships profits. However, to determine those profits, the partnership itself must keep records of its profits.
In a partnership, the law requires that the partners interact with each other in good faith. This requirement raises the relationship between the partners so that any action by a partner that violates the duty of good faith could be considered a breach of fiduciary duty. This could result in damages and messy legal entanglements. Therefore, this type of organization is only appropriate between individuals who trust each other completely. If there is any doubt about your ability to trust your partner, this organization is not for you.
Further, in a partnership the following principles apply:
1. Each partner is both the principal and the agent of the partnership, which means that each partner’s representations and statements will be attributed to the partnership as a whole; 2. each partner is the agent of the firm with the implied power to bind the partnership and every member of the partnership[2]; 3. each partner has equal rights in the management and conduct of the business; and 4. each partner is jointly and severally liable for all obligations, debts and claims incurred by any one of them in the ordinary and usual course of the business of the partnership. [3]
The liability of each partner for debts of the partnership include any contractual liability, tort liability, or basically any liability you can think of that could arise in the course of your business. [4] To be clear, under a general partnership the liabilities of the partnership are the personal liabilities of each partner. This means that if the partnership is sued and a judgment is entered against the partnership, each individual member may be pursued individually, and his or her assets may be seized to satisfy the debts of the partnership.
Due in part to these rights and responsibilities, no additional partners may be admitted to the partnership without the consent of all of the partners or members. However, this rule may be modified by written agreement.
A general partnership is only appropriate between individuals who trust one another completely and where there is limited risk associated with the business. If there is any question about the ability to trust your partner or if there is a potential for extensive liability, this type of organization may not be right for you. However, if the business venture does not have a high amount of risk and the partners have complete trust in one another, this type of business may satisfy your needs.
Limited Partnership
A limited partnership can only be created by following the statutes that allow for its creation. Unlike a sole proprietorship or a general partnership, this entity requires compliance with Georgia law and the completion of the much-dreaded “paperwork.” The major advantage of a limited partnership is that only the general partner is liable for debts of the partnership. None of the other partners (referred to as special or limited partners) of the partnership are liable for the partnerships debts. In a limited partnership, the partnership is generally under the control of the general partner. However, in GA, a limited partner may participate in management without becoming a general partner. [5]
In a limited partnership, the paperwork required to create the entity is fairly straightforward in terms of the actual documents that need to be filed with the state. However, the partnership agreement should be detailed enough to describe the rights and responsibilities of each party so that there is no confusion should a dispute arise.
This type of partnership is particularly useful where there are investors with available funds who would like to support an undercapitalized person with skill in a particular area. By allowing the limited partners to avoid personal liability, they may fund a new enterprise and share in its profits while shielding themselves from risk. [6]In this entity, the limited partners must be granted access to the records of the organization so that he or she may protect his or her investment. [7]
For situations where there is a person or persons with a great idea or plan, but limited funds, this type of organization is appropriate. This organization exchanges the use of capital by investors for the work and knowledge of the general partner. This organization may not be appropriate where several individuals intend to exert equal control over an organization or where no single person is willing to accept all of the liability for the business.
Limited Liability Company
The limited liability company is a statutory entity which can only be created though compliance with the appropriate statutes. This entity provides limited liability for all investors, but allows taxes to be assessed on an individual or “pass-though” basis. This means that each investor would simply be taxed on the income that they receive from the company. Georgia also allows the investors to create an operating agreement that fits the need of the particular organization. This means that each LLC can operate under just about any agreement that the investors deem appropriate for their organization.
In order to create an LLC, the organization must file articles of organization with the Georgia Secretary of State. [8] However, a detailed operating agreement is a wise investment of time and effort so as to ensure that each investor understands their respective rights and responsibilities within the organization.
In a LLC, no member is personally liable for the entities contractual debts unless the member has agreed in writing to be personally liable for the debt. [9] Moreover, individual members are not liable for tortuous acts committed by the LLC unless the member actively participated in, or authorized, the tort.
Creating an LLC is a simplified process that provides many of the benefits of a corporation. An LLC is appropriate where each partner seeks to maintain individual taxation but would also like to limit his or her personal liability. This form of business entity is appropriate for the needs of most small businesses.
The Corporation
The corporation is the most widely utilized form of statutory business entity. This entity allows for the investment of capital by multiple investors while shielding those investors from liability. Essentially, this means that each investor is only capable of losing his or her investment in the corporation, but cannot be held liable for any amount in excess of his or her investment. [10] This limit on liability is extremely valuable for the individual investor. This allows for someone to simply put their money into the corporation without worrying him or herself with management.
The main attributes of a corporation are:
1. it is a legal entity separate and apart from its shareholders;
2. it has the capacity to contract and act as an “individual;”
3. it can own property in its own name;
4. it can commit torts;
5. it can commit crimes where criminal intent is not a necessary element of the crime;
6. it can sue and be sued as an individual; and
7. the interests of each investor may be transferred, sold, or disposed of, without effecting the existence of the corporation.
To create a corporation, the following general procedures must be followed: 1. obtaining a reservation of the name of the proposed corporation; [11]2. publishing notice of incorporation[12]; 3. delivering the articles of incorporation to the Georgia Secretary of State[13]; and 4. filing of the articles of incorporation by the Secretary of State[14]. Of course, to create a corporation that fits the needs of the needs of the prospective business owners, much time and consideration must be taken in creating appropriate governing documents.
Although the corporation has many advantages, there are substantial disadvantages to forming a corporation for the individual entrepreneur or for partners in a small scale business venture. Some of the disadvantages include: a corporation can be expensive to form; it requires substantial time and effort to organize and operate the organization within the statutory requirements (the failure to comply could result in the loss of corporate protection); management may not feel direct pressure from ownership as in other entities; certain records must be published; and there are many complex tax ramifications of forming a corporation.
Moreover, in managing the corporation, formal meetings requiring notice and other procedural hurdles are all a part of doing business. These procedural requirements can create situations where decisions must be delayed in order to allow for all of the procedures to be followed. [15]
The corporation is complex and there are many different forms that a corporation may take. Whether or not this organization is appropriate will depend on numerous factors and considerations, including: the projected size of the business; the amount of capital to be invested; whether the business will operate in multiple jurisdictions; and various other factors. However, if you project substantial growth of your business and would like to have numerous investors, the corporation could be appropriate for you.
Conclusion
Determining the right business entity is an extremely personalized decision. There is no “one size fits all solution.” Instead, each business plan should be considered individually to fit the needs of the organization. To make this determination, Dunlap Gardiner LLP will be happy to assist you.
*This document is provided as general information regarding business entities. Each situation is different and this document does not provide for all of the variables that may be involved in creating a business organization, nor does this document cover all of the business entities available. Further, taxes can be extremely complex and this document does not provide any guidance regarding taxation. You should not rely on this document in creating a business entity. If you are interested in creating an entity tailored to your needs, you should contact Dunlap Gardiner LLP at 678-391-8440 to set up an appointment, we will be happy to assist you in setting up a business organization that fits your needs.
[1] O.C.G.A. 14-8-6
[2] O.C.G.A. 14-8-9, 14-8-11 through 14-8-15
[3] O.C.G.A. 14-8-18
[4] O.C.G.A. 14-8-15
[5] O.C.G.A. 14-9-303
[6] O.C.G.A. 14-9-303
[7] O.C.G.A. 14-9-305
[8] O.C.G.A. 14-11-204
[9] O.C.G.A. 14-11-303
[10] O.C.G.A. 14-2-622
[11] O.C.G.A. 14-2-402
[12] O.C.G.A. 14-2-201.1
[13] O.C.G.A. 14-2-201
[14] O.C.G.A. 14-2-125
[15] O.C.G.A. 14-2-701
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