Updated: Apr 28
There are many business entities and filing your business as one can be confusing. An attorney may help the process of filing become easier and will help clarify any questions you have. This article is focusing on Sole Proprietorships and Partnerships.
Sole Proprietorship –
This is one of the simplest business structures to create. All businesses are considered a sole proprietorship until they are registered with the Secretary of State’s office as corporation, partnership, non-profit entity, or LLC. If deciding to file as a sole proprietorship then you will only need to file a certificate of “Assumed Business Name.” There is no additional paperwork needed.
A sole proprietorship is characterized by the business being owned by one individual. The owner is responsible for all business decisions and financial obligations. The business revenue is considered the owner’s personal income and is taxed at the owner’s personal tax rate. Any debt from the business is also the owner’s debts. The liability between owner’s business and owner’s personal life are non-existent.
If debts are incurred or the business is being sued, then it falls on the owner. This means that the owner’s personal assets can be used to fulfill the debt. A sole proprietorship is not a separate legal entity from the owner, rather it is an extension of the owner in the eyes of the law.
When filling and paying taxes, the owner must fill under Schedule C with the owner’s personal incomes tax return. The owner needs to pay quarterly estimated tax on business profits and pays self-employment tax.
Sole Proprietorships are terminated at the time of the owner’s death, retirement, or bankruptcy. The owner can determine how assets are disposed of through the terms of a will.
General Partnership –
This is characterized when there are two or more people involved with operating a business. This partnership is created when the Statement of Partnership Authority is filed with the Secretary of State’s office. A general partnership can be converted into a Limited Liability Partnership. The Idaho Uniform Partnership Act govern partnerships.
General partners share personal liability for the obligations of the business, there is no limits on liability. Personal assets from the partnership can be used to fulfill debts and satisfy creditor’s needs. This means if one partner has incurred debt through the business then both can be held liable.
The written terms of a Partnership Agreement are what govern the business operations. This agreement is created by an attorney in accordance with state law.
When a partner leaves the business, they need to file a “Statement of Denial” or a “Statement of Dissociation” with the secretary of state’s office. An attorney is needed to amend the Partnership Agreement to reflect the change in business operations.
According to the Partnership Agreement, partners share in the profits and losses of their business. The profits of the business are taxed as personal income.
Partnerships are terminated with death, retirement, bankruptcy, explosion, incapacity or personal bankruptcy or one of the partners. This is dependent on the terms agreed upon in the Partnership Agreement.
Foreign Partnership –
This is when partnerships are organized in another state and want to do business in another state. This requires the business to file a Foreign Registration Statement.
* Something that is important to note, is the possibility of creating a partnership through oral, written or through actions is held up legally under Idaho Law. If two or more individuals “engage in a common effect to make and share profits from a business activity may have created a legal partnership even if not registered with the Secretary of State’s office. *
Limited Liability Partnership (LLP); Professional Limited Liability Partnership –
This is mainly created by professional businesses, such as attorneys, doctors, or certified personal accountants. This helps protect individual’s personal liability from actions of other partners who might negatively affect other partners. This could include misconduct or negligence. The partners continue to share liability resulting from general activities of the partnership.
An attorney is necessary for creating a Partnership Agreement to govern the operations and general affairs of the business. It is taxed like a general partnership. To be classified as an LLP, general partnerships or individuals may fil a Statement of Qualification with the Secretary of State’s office.
Limited Partnership –
This is characterized when there is an unequal capacity of ownership between two or more individuals. Partners/owners are only financially liable for the debts which reflect their financial investment in the business. Because there is unequal capacity, there is usually limited or no control over management of the business. This is mainly the position of those who are silent partners. The general partners/owners who manage the company face the greatest potential risk and reward from the business operations.
This business entity is formed by filing a Certificate of Limited Partnership with the Secretary of State’s office. Silent partners do not need to be identified.
An attorney needs to create a Partnership Agreement which will protect the limited and general partners, providing the details of the terms and responsibilities.