What Every Business Owner Needs to Know About Starting a Company

Eric M. Douthit

Author: Eric M. Douthit

POST DATE: 5.18.16
estate-planning-101

The State of Indiana allows for six (6) basic organizations: Sole Proprietorships; General Partnerships; Limited Partnerships; Limited Liability Partnerships; Limited Liability Companies and Corporations (Note: a new business organization is available as of January 1, 2016, called a Benefit Corporation.  For more information about a benefit corporation, click here.)  Each entity differs in five different areas: Formation; Management; Ownership; Liability Protection and Taxation.  

Sole Proprietorship

  1. Formation: Indiana does not require a Sole Proprietorship to file organizational documents.  To the extent the owner does business using a name other than his/her own, he/she must file an assumed business name certificate with the recorder of each county where he/she does business. 
  2. Ownership/Management: By its very nature, a single individual owns and manages a Sole Proprietorship.  The Sole Proprietorship has no formal record keeping requirements.  It has one class of ownership.  The entity ceases to exist upon the death of the owner and its assets and debts become part of the owner’s estate.
  3. Tax Planning:  As a Sole Proprietorship does not exist without the owner, any profits or losses are personal to the owner.  Generally speaking, the owner will pay self-employment taxes.
  4. Liability: The Sole Proprietorship offers no liability protection to its owner. Its owner is subject to unlimited personal liability.
  5. Cost and Maintenance Concerns: A Sole Proprietorship has the lowest start-up and maintenance costs.  As the State does not require registration, it does not charge a filing fee.  Indiana Code does not require any meetings.  The owner must merely complete Schedule C to its IRS Form 1040 thus limiting annual tax return preparation costs.
  6. Who Should Operate as a Sole Proprietor? Given the flexibility of the other entities, a practitioner should rarely recommend that owners utilize a Sole Proprietorship.  By the time the owners see an attorney or accountant, the complexity of the business and unlimited liability exposure outweigh the sole advantage of those entities’ simplicity.

General Partnership

  1. Formation: A General Partnership is governed by Indiana Uniform Partnership Act.  A General Partnership is made up of two or more people who are co-owners of a business. A General Partnership need not file any documents with the State to register.  However, the partners should have an partnership agreement or written document memorializing the partnership. If the partners do business using a name other than their own, they must file an assumed business name certificate with the recorder of each county where they do business. 
  2. Ownership/Management: The partners own the General Partnerships.  Absent to an agreement amongst the partners to the contrary, all partners share 50-50 in profits, losses and have equal decision-making power.
  3. Tax Planning: The income and losses from the General Partnership pass through to the partners on a pro rata basis.  Generally speaking, the partners will pay self-employment taxes.
  4. Liability: All partners are liable jointly and severally for everything chargeable to the General Partnership. A partner is liable for any wrongful act or omission of any co-partner acting in the ordinary course of the business. This makes the liability concerns of a General Partnership especially disconcerting.
  5. Cost and Maintenance Concerns: As the State does not require registration, it does not charge a filing fee.  Indiana does not require any meetings.  The partners must file Form 1065 with the IRS causing the annual tax preparation to be a bit more than a Sole Proprietorship. 
  6. Who Should Operate as a Limited Partnership?: Again, given the flexibility of the Limited Liability Company (“LLC”) and Limited Liability Partnership (“LLP”), the General Partnership’s role for today’s planner is limited. 

Limited Partnership

  1. Formation:  A Limited Partnership is governed by Indiana Revised Uniform Limited Partnership Act. A Limited Partnership is a partnership formed by two or more persons under the laws of Indiana that has one or more general partners and one or more limited partners. A Limited Partnership must register with the Indiana Secretary of State.  A Limited Partnership must have a written agreement as to the affairs of the Limited Partnership and conduct of its business.
  2. Ownership/Management: The partners own the General Partnerships.  Absent to an agreement amongst the partners to the contrary, all partners share 50-50 in profits, losses and have equal decision-making power.
  3. Tax Planning:  The income and losses from the General Partnership pass through to the partners on a pro rata basis.  Generally speaking, the partners will pay self-employment taxes.
  4. Liability: All partners are liable jointly and severally for everything chargeable to the General Partnership. A partner is liable for any wrongful act or omission of any co-partner acting in the ordinary course of the business. This makes the liability concerns of a General Partnership especially disconcerting.
  5. Cost and Maintenance Concerns: As the State does not require registration, it does not charge a filing fee.  Indiana does not require any meetings.  The partners must file Form 1065 with the IRS causing the annual tax preparation to be a bit more than a Sole Proprietorship.
  6. Who Should Operate as a Limited Partnership? Again, given the flexibility of the Limited Liability Company (“LLC”) and Limited Liability Partnership (“LLP”), the General Partnership’s role for today’s planner is limited. 

Limited Liability Partnership

  1. Formation: The Limited Liability Partnership is also governed by the IUPA.  Its partners must file a Registration of Limited Liability Partnership with the Indiana Secretary of State.
  2. Ownership/Management: The partners own the Limited Liability Partnership.  Absent an agreement amongst the partners to the contrary, all partners have equal rights in the management and conduct of the partnership business.
  3. Tax Planning: Same as a General Partnership.
  4. Liability: A partner of an LLP is not personally liable for the obligations of the LLP or the acts or omissions of any partner.  A partner of an LLP may be personally liable for the partner's own acts or omissions.  An LLP is liable out of partnership assets for partnership debts, obligations, and liabilities.
  5. Cost and Maintenance Concerns: Very similar to that of a Limited Partnership.
  6. Who Should Operate as a Sole Proprietor? Practitioners tend to underutilize the LLP, instead choosing to recommend an LLC.  There are two main reasons.  First, the Indiana Legislature did not permit the LLP until 1995 so case law on this entity tends to be thin.  Second, the LLP is not recognized by all states causing it to be a poor choice for multi-jurisdictional clients.

In summary, there is very little reason not to choose to operate as an entity that provides some sort of liability protection.  Before you open your business, a discussion with your legal and tax advisor will insure that you choose the entity that is best for your situation. 

If you are interested in obtaining further information about business organization or have any questions, contact CCHA. To learn more about Eric and his practice, visit his profile.