We are frequently asked questions concerning the different types of business entities that are available to business owners. This article will discuss three types of business entities, specifically: sole proprietorships, general partnerships and limited partnerships. The next issue of businessINSIDER  will contain an article discussing corporations, including Sub-S corporations, and limited liability companies (LLCs).

    You should always keep in mind that legal requirements vary by state, depending on the business form chosen. Therefore the state law where the business entity is formed must be carefully reviewed. The following, however, are some general characteristics of sole proprietorships, general partnerships and limited partnerships.

    Sole Proprietorship. The primary advantage of a sole proprietorship is its simplicity. The business and its owner are the same. Business income is reported on the proprietor's personal tax return. A significant disadvantage to this type of business entity is that the sole proprietor has personal responsibility for all liabilities of the business.

    General Partnership. This type of business entity consists of two or more persons who own and operate a business in the same manner that one person would own and operate a sole proprietorship. Each partner has unlimited personal liability for all partnership debts (including debts incurred by other partners), can incur obligations on behalf of the partnership, and acts as an agent for the other partners and the partnership. The individual partners pay taxes on their individual share of the profits.

    Limited Partnership. In a limited partnership, there are general partners and limited partners. General partners run the day-to-day operations of the business and have personal liability for all partnership obligations. Limited partners are usually passive investors in the business. They are generally not personally liable for partnership debts and the most they can lose is the amount invested in the partnership.

    More detailed information concerning these types of business entities should be obtained from your accountant and/or attorney or from the author.

This article is not meant to provide legal advice or offer solutions to individual problems. Questions about individual problems should be addressed to the author.

William Gray is a partner in the Law Firm of Vuono & Gray, LLC, Pittsburgh, PA (412) 471-1800