Business Structures and You

Inc. Corp. LLC, LP, PA, PC. Ever wonder what these letters at the end of business names actually mean? Do they have any significance to your life? Well, that depends. These are all phrases or abbreviations indicating the type of legal organization you are dealing with.

General Motors, Microsoft, and every other company whose stock you can buy are corporations. Corporations are individual legal entities that can be created by anyone. Once created, a corporation is like a new person - it can hire and fire employees, own property, and generally do most things that any individual can do. They outlive the people who created them: if you form a corporation today and die tomorrow, the corporation still exists even if you owned all of its stock. When you see the letters "Co." "Corp." or "Inc." in a business name, or the word "corporation" or "incorporated" spelled out, you are dealing with a corporation. The law requires that corporations have these words or abbreviations in their business name so that people doing business with them are aware that they are dealing with a corporation.

A partnership is a business owned by two or more people who have not chosen (and documented) another choice. If a business is owned by two or more people and they have not complied with the documentary requirements to function as another kind of business, the law presumes they are partners - and that they therefore intended to share the risks of the business as well as well as the profits. Without a written agreement to the contrary, the law also presumes that every partner is entitled to the same share of profits and losses as every other partner, regardless of how much each has invested.

A limited partnership is one in which one of the partners (the "limited partner") does not share in the risks of the partnership as much as the other partners. Limited partners invest in the limited partnership and get a share of the profits of the partnership, but their potential loss is limited to the amount they invest. Forming a limited partnership requires specific documents to be drafted and signed by the partners. You know you are dealing with a limited partnership when these words or letters are present: Ltd., Limited, Limited Liability Partnership, or LLP. The law requires that these words be in the business name if a business wants to operate with the limited liability that this business form provides.

So why does it matter to you how a business is structured? The answer is that it only matters to you when things go wrong. If you have a claim against a company - for fraud, breach of contract or causing an injury, it can matter a great deal whether you are dealing with a real person or with a corporation, or with a partnership as opposed to a limited partnership.

Most corporations are formed for the sole purpose of creating a "liability shield" to avoid personal risk and liability by the owners of the business. Corporations are attractive to even the smallest business because generally the owners of the stock of a corporation are at risk only to the extent of their investment in the corporation. Banks know this very well: when they lend money to a corporation, they check it out carefully. If they have any doubts (and it is rare that they don't) they get a personal guarantee of the debt from the human beings who run the corporation.

When you and I deal with a limited partnership or a corporation, particularly one that is not publicly traded, we should bear in mind that a primary purpose of these forms of business is to make sure that the owners are protected from claims we might make against them if things go wrong. A little caution, like asking for a personal guarantee or making sure that the corporation is insured, can't hurt and may save a lot of grief later.

John Polewski is a board certified attorney with offices in Midlothian and DeSoto.