Selecting a particular form of business organization (business entity) may be a difficult step in starting a business. Each type of entity raises different considerations relating to, among other things operations, personal liability, and tax status. Idaho's business entities include: general partnerships, limited partnerships (LP), limited liability partnerships (LLP), limited liability companies (LLC), and corporations. Currently, these are the only business entities authorized by statute in Idaho. (An individual may always begin a business under his or her own name as a sole proprietor, but doing so essentially subject the individual to unlimited personal liability for any debts of the business.
The following descriptions are brief explanations of the above mentioned business entities.
It is hoped that these short descriptions of business entities will be useful tools to help the reader select the most appropriate type of entity for his or her business.
Assumed Business Names are discussed in a note below.
The general partnership is the oldest and simplest form of business organization. Individuals who engage in a common effort to make and share profits are legally considered partners whether the individuals have intended to enter into a partnership or not.
All partners in a general partnership share unlimited personal liability for the obligations of the partnership. The owners of a general partnership are generally taxed only once.
Partnerships may be formally organized in Idaho by the filing of a statement of partnership authority. An existing general partnership may be converted into a Limited Liability Partnership if so desired.
Limited partnerships must have one or more general partners and one or more limited partners. The organizational documents filed with the Secretary of State's Office are not required to identify the limited partners.
Limited partners are not normally personally liable for the debts of the limited partnership and, generally, can only lose the amounts they have invested into the partnership. Beyond that, limited partners cannot normally be subjected to personal liability for the debts of the limited partnership unless they are actively engaged in the management of the partnership.
All of the partners benefit from some liability protection. LLP's were created to shield general partners from personal liability. In the absence of the partner's own negligence, misconduct, or wrongful act, a partner in an LLP can be shielded from being personally liable for acts caused by the partnership and other partners within the partnership. LLP's are taxed like partnerships.
The Limited Liability Company (LLC) has some of the characteristics of a sole proprietorship, some of a partnership, and some of a corporation. An LLC may, for tax purposes, be disregarded, be taxed like a partnership or taxed like a corporation (Idaho Code 63-3006A).
The LLC has members rather than shareholders. Managers or members may exercise day to day management. The LLC is a business organization that operates under a contract (called an operating agreement) between the owners, much like a general partnership.
In order to have a legal existence, the LLC must file a Certificate of Organization with the Secretary of State. The members are protected from personal liability for the acts of the LLC in much the same manner as corporate shareholders. Unlike limited partnerships, LLC's do not impose personal liability on members for participating in management.
The corporation is the original structure for providing personal liability protection to the owners of a business. Although a corporation is now easier to organize, it may not be the best entity choice for starting up a business. A corporation must have a board of directors. The board may consist of a single individual. A corporation must also maintain certain books and records and hold annual shareholder meetings. In small, closely held corporations, the documentation of these activities may be more onerous than is warranted.
Unless qualified as an 'S' Corporation pursuant to extensive IRS rules, a corporation is subject to double taxation, i.e.; income is taxed once at the corporate level and then taxed once more when income it is distributed to shareholders as a dividend.
The filing of an Assumed Business Name (ABN) in the Secretary of State's Office has only one purpose - to give notice to anyone who inquires at the Secretary of State's Office that the person(s) who filed the ABN is doing business under the name which has been filed in the Secretary of State's database. The filing of an ABN does not create a distinct legal 'person' or any form of business organization. ABN's should not be construed as an 'Idaho Business License'.
Taxation and personal liability, are only a few of the factors to consider when deciding the type of entity that is best for your business. Other important factors may include: