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Which designation is right for your small business?

The most common question attorney Brian W. Carter is asked when he gives workshops to aspiring small-business owners is whether they need to register as a business entity.

Carter, of Lemoyne’s Johnson, Duffie, Stewart & Weidner, says it is generally a good idea to seek a business designation to provide for liability protection.

So, what are the classifications available in Pennsylvania? Carter takes us through the options.

Sole proprietorship

Sole proprietors are doing business on their own without any official filings with the state. The individuals are doing business under their own names or under trade names, and they are fully liable for the activities.

Partnership

A partnership is fairly similar to a sole proprietorship, except more than one person is involved. There is not a separate business legal entity.

“The partners are fully obligated for all debts and obligations of the business,” Carter said.

Limited partnership

In terms of tiers of designations, a limited partnership is the first entity that requires a filing with the state. There is a limited partner who doesn’t have a say in day-to-day operations and a general partner who handles that daily management and is fully liable.

Limited partnerships are more common in real estate, in large part because of Pennsylvania’s capital stock and franchise tax. Limited partnerships allow for ways to avoid paying capital stock and franchise tax on real estate.

Limited liability company

The classification of LLC has been around for about 20 years.

“The great thing about a LLC is it gives you some liability protection. It’s much less rigid on management,” Carter said.

For an LLC with one owner, all profits and losses are reported on that person’s income taxes. LLCs with more than one person involved can be taxed as a partnership or corporation, depending on what makes sense for the type of business.

LLCs do not require annual meetings or boards of directors. The owners can manage the LLC, or they can hire someone to handle management.

Corporation

Like an LLC, a corporation provides liability protection for business owners. There are two types — C Corp. and S Corp. — for tax purposes, depending on the number of owners and their roles.

A potential drawback to this designation is that a board of directors must be established, annual meetings must be held, and changes regarding the board need to be reported to the state.

Registering as a corporation carries a requirement that notice be published in a legal journal and general-circulation newspaper, Carter said.

Other

Other, more specialized business designations include limited liability partnerships, family partnerships and professional corporations, which carry limitations about which types of professions are eligible.

Using the abbreviation “Co.” is an option for a limited liability company or corporation, Carter said. “Inc.” is an option for a corporation, and “Ltd.” is an option for a limited partnership, he said.

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