What You Need to Know About Legal Structures for Small Business

A Sole Proprietorship (SP) is an individual owning and operating a business in his or her own name without partner(s). In a SP:

• All liabilities and debts of the business are the personal debts and liabilities of the owner.
• Business income is reported and taxed through the owner’s personal tax return.
• All assets of the business are assets of the owner, subject to all debts of the owner.
• The business exists only as long as the owner does not die or retire;  however it may be sold, or transferred by gift or will, to another individual or legal entity.
• If you do business as a SP under your name, no formation document is necessary; however if you operate the business under another name, you must register an Assumed Name Certificate

(“d/b/a”, or doing business as) by filing with the Clerk of the county(ies) in which the business operates.

There are two types of Partnerships:

A General Partnership (GP) is two or more individuals owning and operating a business together.  In a GP:

• All liabilities and debts of the business are the joint and individual personal debts and liabilities of the owners (called “general partners”).
• Business income is reported and taxed through the owners’ personal tax returns.
• All assets of the business are assets of the general partners, subject to other debts of the general partners.
• If there is no partnership agreement providing otherwise, the business exists only so long as one of the partners does not die or retire, or an event of dissolution does not occur.

A Limited Partnership (LP) is a business organization that has two levels of ownership: it must have at least one general partner and one limited partner.  The LP’s affairs are conducted by the general partner(s), and the limited partners have no control over conduct of the business.  In an LP:

• All liabilities and debts of the business are the joint and individual personal debts and liabilities of the general partner(s); limited partners are liable up to the amount of their investment in  the partnership.
• All assets of the business are assets of the general partners (owners), and may be subject to other debts of the general partners.

GPs should be, and LPs must be, formed by an agreement between the partners covering what  is expected from each partner in terms of the business.  LPs must also file a Certificate of Limited Partnership, publish information about the initial Certificate of Limited Partnership in recognized newspapers in the State of New York, and file an Affidavit of Publication with the State of New York Department of State.

Both types of partnership must register an Assumed Name Certificate by filing with the Clerk of the county(ies) in which the business operates.

The income from both GPs and LPs is reported and taxed through the personal tax returns of the partners.

A Corporation is a legal entity. The corporation has rights, duties, and abilities similar to individuals.  It is owned by one or more persons (individuals or another legal entity) called  “shareholders”.  The corporation:

• Is formed by filing a Certificate of Incorporation (signed by an individual) with the New York State Department of State.
• Issues stock certificates to shareholders.
• Operates and makes decisions through its board of directors and officers according to its bylaws and other governing documents.
• Has an unlimited life, or a  life limited to the time period set out in its Certificate of Incorporation.
• Must do business in the legal name of the corporation as set forth in its Certificate of Incorporation.  However, if the corporation operates the business under another name, it must file an Assumed Name Certificate (“d/b/a”, or doing business as) with the Clerk of the county(ies) in which the business operates.
• Is generally responsible for its own liabilities and debts, and its assets do not belong to the shareholders personally.
• Pays state franchise taxes and federal and state income taxes;  shareholders are taxed only on monies actually received from the corporation. In a “Subchapter S” corporation, however, the income of the corporation is reported and taxed through the personal tax return of the shareholder.

A Limited Liability Company (“LLC”) is an unincorporated business organization that may be formed and/or owned by one or more individuals or legal entity(ies).  Individuals and legal entities who are owners of an LLC are called “members”.   An LLC:

• Is formed by preparing Articles of Organization (signed by at least one organizer), publication of the Articles of Organization or a notice about the formation of the LLC in recognized newspapers in New York State, and filing a Certificate of Publication with the New York  State Department of State.  The LLC has a life span that may be set out in the Articles of Organization or until dissolved by law.
• Operates and makes decisions in accordance with the provisions of its Articles of Organization, Operating Agreement, and the Limited Liability Company Law.
• Must do business in the legal name of the LLC as set forth in its Articles of Organization.  However if the LLC operates the business under another name, it must file an Assumed Name Certificate (“d/b/a”, or doing business as) with the Clerk of the county(ties) in which the business operates.
• Is responsible for its own liabilities and debts; its members are not responsible.
• Can elect to be treated for tax purposes as either a corporation, a partnership (if there are two or more members), or a sole proprietorship (if there is only one member).

Individuals or organizations seeking information or assistance should call 212-426-3000 during business hours and ask for the Community Development Project.

The Community Development Project provides free transactional legal services to qualified small businesses and non-profits throughout the five boroughs of New York City

The information in this document has been prepared by The Legal Aid Society for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. You should not act upon any information without retaining professional legal counsel.