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.
- Individuals planning to start a business should seriously consider seeking professional legal and tax advice before making a final decision as to the type of entity.
- This rough outline is not a substitute for such legal advice.
- Some of the relevant statutory provisions that govern each type of organization are cited for your information. These citations do not encompass the entire scope of the law on these subjects, and are only means to serve as a point of reference for the user.
Assumed Business Names are discussed in a note below.
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 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.
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.
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.
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:
- The perceived needs for a given management structure
- The need for ease in transferring all or part of business ownership
- The need for withdrawing the investment in the future
- The need to conduct the business in more than one state, either initially or in the future