Part 2 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process
Several types of legal entities are available to operate your real estate venture. The entity type most appropriate for your business will vary depending on factors such as the number of owners, desired tax treatment, and management preference. Below we’ll outline several of the more commonly utilized types of entities available: limited partnerships, corporations, and limited liability companies.
One commonly used entity is the limited partnership (LP). To explain how a limited partnership operates, it is first necessary to describe what constitutes a regular or general partnership.
A general partnership is typically defined as a business where two or more people share ownership and management. This type of partnership does not require a special filing with the Secretary of State and is generally presumed when two individuals go into business together. In a general partnership, each partner is expected to contribute to the business and management decisions are made together by the partners. Profits and losses are split equally between the partners in the absence of a written agreement. General partnerships do not have personal liability protections — each partner is personally liable for the debts and liabilities of the business.
An LP alters a general partnership in management and liability. LPs have a general partner and a number of limited partners. Management of the LP is vested in the general partner, who remains personally liable for all debt and liabilities of the business. The limited partners do not manage the day-to-day affairs of the company, but their liability is typically capped at the amount of their investment in the partnership. This entity type can be useful when silent investors are present. LPs can only be created through filings with the Secretary of State.
The next entity type is perhaps the most commonly known entity type: a corporation. A corporation is a type of legal entity owned by its shareholders. There are several types of corporations with the primary differences being in tax treatment and limitations in the number and type of shareholders each type permits. Management of the corporation is typically vested with an executive board of directors.
One advantage of corporations is in the ability to sell ownership shares in the business through public or stock offerings. These sales can be very lucrative for initial investors, which can attract much-needed early capital for your business.
Another advantage is limited liability. The corporation, not its shareholders, is generally liable for the company’s debts and liabilities and shareholders’ exposure is typically capped at the amount of their investment.
The primary downside to corporations is in their complexity and record-keeping. In addition, Secretary of State filing requirements can be a substantial burden on small businesses. As such, they are typically utilized in and for established and more complex business ventures.
Limited Liability Companies
A limited liability company (LLC) is a hybrid legal structure that provides the limited liability features of a corporation with the tax and operational benefits of a partnership. LLCs are owned by their members (or member is there is only one) and can be managed by the members or a designated manager.
Profits and losses of the LLC “pass through” to the members for tax purposes, though liability, if the entity is properly managed, stops with the entity. In general, LLCs are not limited in the number or type of members and, in Missouri, they do not have separate annual reporting requirements to the Secretary of State. As a result, LLCs are favorites of small businesses with relatively few transactions or assets to manage.
No two businesses are exactly alike and your particular business features will dictate which type of legal structure is most appropriate. Consultation with experienced industry professionals at this juncture can help you select the most appropriate entity type for your business and help you avoid costly mistakes as well as unnecessary headaches for your business.