BUSINESS ENTITIES

 

SOLE PROPRIETORSHIP

  • What is a sole proprietorship?

    The sole proprietorship involves a single, individual owner who is liable for all of the debts, obligations, and liabilities of the business. Business may be conducted under a trade name providing compliance with North Carolina law which entails the filing of an assumed name certificate. With respect to federal income taxes, income of the owner is reported on Schedule C, Business or Profession, and attached to the owner's tax return setting forth the income or loss of the business. A disadvantage of the sole proprietorship is that it offers no protection of your personal assets from creditors of the business.

 

GENERAL PARTNERSHIP

  • What is a general partnership?

    A general partnership is an association of two or more persons to carry on as co-owners of a business for profit.

  • How do you form and manage a general partnership?

    In North Carolina, a general partnership must file a certificate of assumed name with the register of deeds in the county where the principal office is located. No written general partnership agreement is required to form a general partnership, thus partnerships may be formed based on oral agreements and proven by acts and conduct of the parties. If the partners enter into a written agreement, the written agreement will control the partnership with respect to the rights and obligations of the partners except for those matters not addressed in the agreement. If there is no written agreement, or if the written agreement does not address a particular issue, the North Carolina Uniform Partnership Act ("UPA") controls the rights and obligations of the partners.

  • What liability do the partners have for the partnership debts and obligations?

    Partners have unlimited personal liability for obligations of the partnership, and full authority to exercise managerial control over the business unless limited by agreement. Each partner has the apparent authority to act on behalf of the partnership. Unless the person with whom a partner is dealing has knowledge of the partner's lack of authority, the partner can bind the partnership and all other partners by his actions within the scope of the business. This can occur regardless of whether or not the partner is acting in good faith.

  • How is the general partnership taxed?

    General partnerships have pass through tax treatment meaning that income and loss is passed through to the owners and reflected on the owners' tax returns. Although the partnership itself does not pay income taxes, the partnerships must file informational returns with the Internal Revenue Service.

 

LIMITED PARTNERSHIP

  • What is a limited partnership?

    In North Carolina, a limited partnership is a partnership formed pursuant to the North Carolina Revised Uniform Limited Partnership Act ("RULPA"), and consists of one or more general partners, and one or more limited partners.

  • How do you form a limited partnership?

    Pursuant to RULPA, a certificate of limited partnership must be filed with the North Carolina Secretary of State. Additionally, the partnership must maintain certain information relating to the partnership at an office in North Carolina. The required information includes copies of the limited partnership certificate and any amendments thereto, a list of all the partners, the partners' last known addresses, federal, state and local tax returns for the partnership for the last three years, copies of all powers of attorney, and copies of any effective written partnership agreements and any financial statements for the last three years.

  • Who is in charge of managing the limited partnership?

    A limited partnership is managed by one or more general partner(s) who possess all of the rights and powers of a general partner in a general partnership. Limited partners have no right to participate in the management of the limited partnership. However, certain actions of the general partner may require the written consent of the limited partners if specified in the partnership agreement.

  • What liability do the limited partners have?

    Generally, pursuant to RULPA section 59-303, a limited partner is not liable for the obligations of a limited partnership beyond hiscontributions by reason of being a limited partner. There are certain situations where a limited partner will jeopardize his limited liability through his actions or conduct or by using his name in partnership matters. A general partner has the same liability as in a general partnership.

  • How is a limited partnership taxed?

    Generally, with respect to federal taxes, a limited partnership is taxed the same as a general partnership.

 

CORPORATION

  • What is a corporation?

    Corporations are legal entities formed under the laws of the state of incorporation. With respect to federal income taxes, corporations are generally taxed as separate entities and are subject to the provisions of Subchapter "C" and Subchapter "S" of the Internal Revenue Code. "C" Corporations are taxed on earnings at the corporate level, and the shareholders are also taxed when they receive dividends. Generally, "S" Corporations are not taxed at the corporate level but have "flow through" tax aspects, similar to a partnership, with the shareholders recognizing their pro-rata share of net income or loss of the corporation for each taxable year.

  • How do you form a corporation?

    To form a corporation in North Carolina, strict compliance with state law is required. Generally, these requirements include preparing and filing articles of incorporation, conducting organizational meetings of shareholders and directors, preparing and adopting a set of by-laws, establishing records and books of the corporation including minutes of the meetings, determining the amount of the contribution to be made by each shareholder in exchange for the issuance of shares of stock in the corporation, and the filing of any required reports with appropriate federal, state, and local offices.

  • Who manages the corporation?

    The board of directors, who are elected by the shareholders, manage the corporation. To assist in the management, the board of directors elect officers who conduct the day-to-day activities of the corporation.

  • What liability do the investors in a corporation have?

    Generally, a shareholder or director of a corporation is not personally liable for the debts and obligations of the corporation beyond his or her contribution. However, a shareholder, officer or director may become personally liable based on his or her individual actions.

  • What is a "C" corporation?

    A "C" Corporation is a corporation that is taxed pursuant to Subchapter "C" of the Internal Revenue Code. "C" Corporations are taxed on earnings at the corporate level, and the shareholders are also taxed when they receive dividends. Generally, there are no limitations as to the types of shareholders in a "C" Corporation.

  • What is an "S" corporation?

    If a corporation meets the requirements to be taxed as an "S" Corporation, the corporation will have flow through tax treatment with the shareholders recognizing their pro-rata share of the net income or loss of the corporation for each taxable year. "S" Corporations must be domestic corporations, have only one class of stock, and have no more than 75 shareholders. The shareholders must be individuals, estates, certain types of trusts, or in certain circumstances, other "S" Corporations. Since an "S" Corporation may only have one class of stock, flexibility in structuring equity and debt is limited.

 

LIMITED LIABILITY COMPANY

  • What is a limited liability company?

    A limited liability company ("LLC") combines the corporate aspect of limited liability for its members, regardless of the extent to which they take part in the business, with the tax advantages of a partnership. Instead of shareholders as in a corporation or partners in a general or limited partnership, the owners of an LLC are called "members". A member may be any "person" which includes and individual, partnership, limited partnership, trust, estate, LLC, foreign LLC, domestic or foreign corporation, unincorporated association or other entity.

  • How do you form a limited liability company?

    To form an LLC in North Carolina, strict compliance with state law is required. Generally, these requirements include preparing and filing of articles of organization, conducting an organizational meeting, establishing the books and records of the LLC, preparing and adopting an operating agreement, issuing ownership interests in the LLC, and filing of any required reports with appropriate federal, state, and local offices. There is no requirement that the operating agreement be in writing, however, without a written agreement, the laws of the state of formation will control and govern.

  • Who manages a limited liability company?

    An LLC may elect to either be managed by all of its members or by designated managers.

  • What liability do the members of a limited liability company have?

    A member or a manager of an LLC is generally not personally liable for the debts and obligations of the LLC beyond his or her contribution. However, a member or a manager may become personally liable as a result of his or her own acts or conduct, or if he or she personally guarantees debts or obligations of the LLC.

  • How is a limited liability company taxed?

    The LLC may elect to be treated as either a corporation or partnership for federal income tax purposes. LLCs can have several classes of equity and debt thus providing greater flexibility to its members in the structuring of their financial interests.

  • What are professional limited liability companies?

    Certain groups of professionals may engage in professional services through a professional limited liability company ("PLLC") subject to the same terms and conditions for the rendering of professional services through a professional corporation under North Carolina General Statutes Chapter 55B, the Professional Corporation Act.