In general, a person may elect to do business as a “dba” which is an acronym for “doing business as.” This is a legal fiction as far as the law is concerned. The business is usually tax identified using the person’s individual social security number as a tax identification. The profits of the business are individual to the person and so are the losses. If anything goes wrong with the business, the person can be sued individually and his assets attached if there is a subsequent judgment against him or the business.
Two or more persons may also form a partnership to conduct business. In a general partnership there are two or more partners. The partnership will often have a separate tax identification number, but will file an informational income tax return only. The profits and losses of the partnership are distributed to the individual partners as their interests appear and they pay the income tax individually at their own tax rates. If there is any liability asserted against the partnership the assets which the partnership owns may be attached by its creditors. In addition, the partners are usually individually liable for the acts of the partnership and they may also be sued individually by a creditor.
In general partnerships each partner usually has the ability to legally bind the partnership and to act legally for the partnership. As in all business arrangements, it is a good idea to only have a partnership with those persons you trust.
In a limited partnership (as distinguished from a general partnership) there must be at least one or more general partners. These persons have the same rights, duties and liability as a regular partner in a general partnership. These general partners may bind the partnership legally and if there is a creditor’s lawsuit against the partnership, the general partner’s individual assets may be subject to attachment by this creditor for the acts or omissions of the partnership.
The distinguishing characteristic of a limited partnership is the addition of one or more limited partners. These limited partners, unlike the general partner, have little or no actual control over the actions of the partnership and do not share in management decisions. These limited partners are generally entitled to receive pro rata profit distributions from the partnership as their partnership interests appear. However, if there is a successful lawsuit against the partnership or the partnership has incurred obligations which it cannot satisfy, the individual assets of the limited partner are not subject to attachment by the creditor. The investment which the limited partner made into the partnership may be attached, but his or her individual assets are usually not reachable by the creditors of the partnership.
There are other characteristics of limited partnerships which make them attractive as estate planning vehicles. Limited partnership shares if structured properly may not allow for a limited partner to transfer his or her ownership share to any person other than an existing partner of the partnership or some other defined family member. Creditors have an unusually difficult time successfully attaching limited partnership shares from a limited partner. Divorce protections are usually built in allowing for the partnership share to remain within the defined group if a divorce occurs.
For gift tax reasons for the reasons cited above, limited partnership shares may not be as valuable to the recipients as would a direct transfer of cash. Accordingly, if structured properly, the donor giving the gift may have gift tax advantages and be able to transfer more limited partnership interests using less of his or her gift tax exclusion amounts as a credit to offset these transfers.
Limited Liability Companies
Another business vehicle is a limited liability company. Whereas limited partnerships generally refer to their representative ownership units as partnership shares, limited liability companies refer to their representative ownership units as membership shares.
In many respects limited liability companies mirror the business aspects of a partnership, with one key difference. In a limited liability company, the members are not usually individually liable for the acts of the limited liability company. This key difference distinguishes a limited liability company’s members from the partners in a limited partnership. In a limited partnership the general partner will generally remain individually liable for the acts of the partnership and the limited partners will remain liable to third parties in direct correlation to the amounts they have invested into the partnership. Limited liability companies may have multiple members but unlike a partnership, a limited liability company may have just one member if it so elects.
Also limited liability companies may elect to be taxed as stand alone business entities or in a manner more similar to a partnership.
There are other variations on this theme and multiple combinations of these entities which a person engaged in business may elect to use in conducting his or her business.
This is a short and by no means exhaustive synopsis of these business structures.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon, Jeff Roth, and Jessica Moon are Members in Roth & Bacon Attorneys with offices in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ David F. Bacon