By Kimi Murakami
As government contractors, the business universe is likely filled with familiar acronyms. However, one may not be as familiar with the meaning behind the alphabet letters that comprise the different business entities in the corporate world.
Choosing the form of legal entity for your company was most likely a threshold issue for starting your business. By forming a company, you can shield yourself from liabilities that will arise by the business. Whether just starting out or if you’ve been in business for a while, it is important to know the differences between the various types of corporate entities. Below are a few types of business entities most commonly used by small entrepreneurs:
GP and LP. A “GP” is a general partnership and an “LP” is a limited partnership. All partnerships require more than one person, and each person is known as a “partner”. We highly recommend that a general partnership have a partnership agreement between all partners, but a written document is not required.
Additionally, in the case of a general partnership, an instrument or document does not need to be filed with the state where the partnership is doing business. In contrast, to form a limited partnership almost all states require that a certificate of limited partnership be filed with the secretary of state of the state of formation.
There are two types of partners in a limited partnership: limited partners and general partners. The liability of limited partners is limited to the amount of their investment as compared to that of general partners. General partners have unlimited liability. A limited partnership agreement among the general and limited partners is required.
JV. A “JV” is a joint venture. Like a GP or LP described above, a joint venture is a type of business entity that requires one or more other person or entity to participate in the joint venture. Similar to a GP, no instrument must be filed with the state to form a joint venture, but a written joint venture agreement must be entered into to form the JV.
A joint venture may also choose to go one step further and form a limited liability company, which is further discussed below. Particularly, if the JV will be a government contractor, it may be prudent to take the extra step of forming a JV-LLC in the event that one of the joint venturers does not succeed. If there are only two joint venturers and if one goes under, then as pointed out above, you are left as a JV of one, which is not legally permitted. As a government contract holder, the JV entity would have to novate the contract to you as the remaining JV member if you wanted to continue performing the work on the government contract.
An LLC, on the other hand, can have a single member and if one joint venturer went down, then the remaining venturer could continue performing the work through the JV-LLC without novating the contract.
LLC. An “LLC” is a limited liability company. An LLC is a relatively new choice of corporate organization options, and can be formed by LLC laws of each state. LLCs have become a very popular option for small businesses, in particular, those with a small number of owners known as “members” of a limited liability company. LLCs are taxed liked a partnership whereby the LLC itself is a disregarded entity and taxes are passed through and paid by the members. Avoiding “double taxation” at the entity level and owner level is one of the primary reasons that the LLC has become an increasingly popular choice when choosing an entity type.
LLCs offer limited liability to its members and can be managed by the members or a manager who may not be a member. A document known as a Certificate of Formation must be filed with the secretary of state of the state of formation for the LLC, and the members enter an operating agreement that serves as the governing document for the LLC.
C-Corp. A “C-Corp” is the standard corporation that is traditionally what comes to mind as an “Inc.” It is an organization formed by filing articles of organization at the state level, governed by bylaws, and can issue shares of stock to evidence ownership by the shareholders. Standard C-Corps are governed by directors who are elected by the shareholders. C-Corps are subject to two levels of federal income tax–at the corporate level when earned and at the shareholder level if the owners receive dividends from the corporation.
S-Corp. An “S-Corp” is a small corporation which cannot have more than 100 shareholders. It also is treated as a partnership for tax purposes by the Internal Revenue Service under Subchapter S (hence the name). S-Corp shareholders must be individuals (certain trusts are permitted, too) and the owners must be United States citizens.
QSSS. A “QSSS” is a Qualified Subchapter S Subsidiary or a Q Sub. It is an S-Corp that is 100% owned by another S-Corp. A company must make an election to be treated as a QSSS. The QSSS will be disregarded for tax purposes and all of its income, losses, etc. are aggregated with the parent S-Corp and the parent and subsidiary file the same tax return. For federal income tax purposes the subsidiary will not be treated as a separate corporation. In addition to having S-Corps as subsidiaries, parent S-Corps can have standard C-Corps or LLCs as subsidiaries.
About the Author: Kimi Murakami is counsel with PilieroMazza in the Business and Corporate Law Group. She may be reached at kmurakami@pilieromazza.com.