LLC. LLP. DBA. CEO. CIO. IDK???
The business world and the legal world are filled with acronyms that can be a big headache to attempt to navigate. As a business owner, you probably already know the basics, but as your business grows you may be faced with a number of decisions and options dealing with some of the lesser-known acronyms.
For example, you may want to consider protecting your personal assets by organizing your business under an LLC or you may want to partner with another business for a specific and limited goal. What are the options and what will work for you?
Sole Proprietorship (SP)
This is the most basic form of business organization. There is no distinction between you (the one owner) and the business, meaning you are entitled to all of its profits, losses, and liabilities. If you have started a business and you are the sole owner, then you have started an SP. Jurisdictions may require registration of your SP.
A Corporation (Corp) is a legal entity that is separate from its owners. A Corp is created (incorporated) by a group of shareholders, who collectively own the business. Shareholders generally elect a board of directors to manage the business. Shareholders are generally owed a part of the profit but are not liable for the corporation’s actions.
There are two types of corps:
- C Corporation: When you form a corporation you have automatically set up a C Corporation. This means that the Corporation will file its own taxes.
- S Corporation: Once a corporation has been formed, you can choose to be an S Corporation, which means you file the corporation’s taxes on your personal tax return. This is often used for small businesses.
Limited Liability Corporation
A limited liability corporation (LLC) is a legal entity that is separate from the person(s) (members) that formed the LLC. This means that the LLC takes actions and not the members. For example, if a client sues for breach of contract, they are suing the LLC for the breach and not you personally.
The formation of an LLC is a personal decision and not required by law for the operation of your business. The usual purpose for forming an LLC is to protect the member(s) that formed it from personal liability. This means that each member’s personal assets will not be reachable by a court of law. In other words, if an LLC is sued, only the assets of the LLC can be reached by the court and not your personal money and possessions.
The name of the LLC is the legal name for the business and must be used on all legal forms. For example, if you use ‘brand names’ they cannot be used on a contract.
Brand Names Or ‘Doing Business As’ Names
A brand name, or a ‘doing business as’ (DBA) name, is a title that a business owner uses to sell certain products or services that is NOT the legal name of the business. This is also called a ‘fictitious name’ or ‘trade name’. Keep in mind that most states will have registration requirements for a DBA, including a registration fee.
With an LLC, members are protected from liability. This is not the case with a DBA as it is not a separate legal entity. The business owners will be liable for any decisions or actions of the DBA.
A general partnership (GP) is a business association between two or more people for the purpose of earning profit. A GP can be created very informally and may be found in any instance where you are ‘in business’ with another. This means that even if you did not necessarily intend to be in a partnership, you may be!
In general, each partner is liable for their own actions, their partner’s actions, and the actions of the business they are in partnership with. Depending on your jurisdiction, as a partner, you may be jointly liable, severally liable, or jointly and severally liable.
- Joint liability: The partners can be sued as a group.
- Several liability: The partners can be sued individually.
- Joint and several liability: The partners can be sued as a group and individually.
A limited partnership (LP) is an agreement between at least one general partner and one limited partner. The general partner maintains control over management and is personally liable for the partnership. The limited partner generally has limited liability.
Limited Liability Partnership
A limited liability partnership (LLP) is a lot like a limited partnership (LP). The main difference is that all general and limited partners have limited liability, outside of their direct investment in the LLP. Generally, an LLP partner will only be responsible for the results of their own actions.
LLPs are often formed for professional organizations (e.g., law firms and accounting firms). Certain jurisdictions may only allow an LLP for certain professions.
Business insurance can protect you where an LLC, or other liability reducing business organization, cannot. The most common for small businesses is general liability insurance.
For example, you are shooting a wedding and to get the perfect shot you back up into a glass coffee table, fall on it, and break it. Depending on your policy, the replacement cost is likely covered.
Putting It All To Use
Scenario: You own ABC Photography, and you want to partner with DEF Photography for weddings only. In this venture, you want to be known as XYZ Photography.
How do you sign contracts if you want to be able to use your liability insurance from your separate businesses?
In order to use your liability insurance, you will have to sign any contract using your legal business name, as opposed to solely using your DBA. You may both sign the contract as:
- ABC Photography, d.b.a. XYZ Photography
- DEF Photography, d.b.a. XYZ Photography
This should allow you to maintain your individual coverage if you have not legally organized a new business as XYZ Photography.
It will be vital in this instance to know the ins and outs of your liability policy. It may specifically not allow signing a contract like this. In that case, in order to maintain coverage, you will likely need to organize a new business under the legal name XYZ Photography and take out a separate policy in conjunction with your partner.