Not All Business Entities Are Created Equal

By: Michael Safren, Esq.

 

A business entity is a separate legal being from the actual business owner, created to engage in business or trade. For many business owners, the most important aspect of the business entity is the entity’s structure, which creates the ability to separate the debts of the business from the owner or owners.  This separation can prevent lenders, judgement creditors, and even the government from gaining access to the business owner’s personal assets such as their house, vehicles, and cash, to satisfy a debt or obligation incurred by the business. 

 

However, not all business structures offer the ability to shield the owner’s assets from business liabilities. Two business structures; Sole Proprietorships and General Partnerships  do not limit the owners’ liability for business liabilities or debt.  A sole proprietorship is when a single person or married couple operate in business, and does not require any sort or registration with the state to form or create this structure.  A general partnership is when two or more people who agree to contribute money, labor, and/or skill to a business and does not require any registration with the state to form or create this structure.  It is important to note that there is a presumption that the association of two or more persons to carry on as co-owners a business for profit forms a general partnership, whether or not the persons intend to form a partnership.  

 

In contrast, a Limited Liability Company, and a Corporation will limit owners’ liability for the entity’s debts and obligations.  Limited Liability Companies and Corporations are required to registered with the Secretary of State. A Limited Liability Company is required to file a Certificate of Formation with the Secretary of State and is operated by its member or members under the terms of an operating agreement.  A Corporation is required to file Articles of Incorporation and is operated on behalf of its shareholders by a board of directors under the terms of its Corporate By-Laws. 

 

Below is a handy table identifying various business structures some aspects of each.

 

Name of Entity Structure

Composition of Entity

Does the Entity Limit the Owner’s Liability?

Is the Entity Required to Register with Secretary of State

Sole Proprietorship

One person or married couple

No

No

General Partnership

Two or more people

No

No

Limited Liability Company

Members

Yes

Yes

Corporation

Shareholders  

Yes

Yes

 

           

Insulation from personal liability is just one of many concerns business owners should consider in selecting the appropriate business structure. You should consult an attorney to help you understand all the advantages and disadvantages of the various business structures here in Washington.

 

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, and civil litigation. 

 

 

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