March 6, 2014

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Not Business as Usual

New Considerations for Choosing Your Business Entity

By Tacy Hartman

March 6, 2014


If you intend to start a new business this year, you should be aware of some significant changes in Utah law that may affect the type of entity you select for your business. New laws governing general partnerships, limited partnerships and limited liability companies took effect on Jan. 1,2014, and apply to any such entity formed on or after that date.

Existing partnerships, limited partnerships and limited liability companies are governed by prior law until Jan. 1, 2016, when the new laws will also apply to them, unless they elect before then to be governed by the new laws.

Let’s review the basic choices and see what’s new.

Sole Proprietorship

The simplest choice is to form your business as a sole proprietorship, with you as the sole owner. You’ll have to file a “doing business as” (dba) application to register a unique name with the Utah Department of Commerce, Division of Corporations and Commercial Code (the Division) and obtain a local business license. Profits and losses will be reported for tax purposes as part of your personal income. While simple, you will automatically have personal liability for the debts and other obligations of the business—something to avoid where possible.

General Partnership

If you have more than one owner, the next simplest entity is a general partnership. A general partnership has essentially the same filing requirements as a sole proprietorship—a dba application and local business license. It will have to file state and federal tax information returns, but profits and losses are reported by the partners as part of their personal income.

If the partners agree (and every lawyer I know would recommend the agreement be in writing), they can allocate profits and losses in proportion to their investments in the partnership, equally, or under an entirely arbitrary formula. Without such agreement, distributions and profits and losses of partnerships formed after Jan. 1, 2014, or existing partnerships opting-in to Utah’s new Uniform Partnership Act, are shared equally among the partners.

The major drawback of a general partnership used to be that each partner had joint and several personal liability for the obligations of the business. This drawback can be eliminated, with some exceptions, if you register the partnership as a limited liability partnership (LLP), in which case a partner will not be liable for the obligations of the partnership incurred during its existence as an LLP beyond his or her investment in the partnership, except for the partner’s own wrongful acts or omissions in rendering professional services. To form an LLP, you will need to file an application/statement of qualification with the Division.

Limited Partnership

Next up is the limited partnership, which requires the filing of a certificate of limited partnership with the Division. Limited partners of limited partnerships cannot participate in management, but have no personal liability for business obligations beyond the amount of their investment in the partnership.

It used to be that a limited partnership had to have at least one general partner who managed the business and retained personal liability for its obligations if the limited partnership’s assets were insufficient to pay them. Now, a limited partnership formed on or after January 1, 2014, or an existing limited partnership electing to be governed by Utah’s new Uniform Limited Partnership Act can, with some exceptions, eliminate the personal liability of a general partner for the debts of the partnership by becoming a limited liability limited partnership (LLLP). To form one, you simply state in the certificate of limited partnership that the entity is an LLLP. Tax treatment is the same as for general partnerships as is the default rule on equal distributions.

Limited Liability Company

In Utah, as in many states, a limited liability company (LLC) is the go-to choice of entity for most new businesses. This is because an LLC provides the limited liability protection of a corporation for its owners, the flexibility and lack of formality of a partnership, and the ability to choose whether your business is taxed as a partnership or a corporation.

Utah’s new Revised Uniform Limited Liability Company Act has reduced the filing requirements for an LLC and expanded the role of the operating agreement as the main governing tool of an LLC, even if it is not in writing. The Act has improved the rights of members who lend money to their LLC and has established many new default rules, most of which can be overridden in the operating agreement.

Corporation

Finally, you can choose to make your new business a corporation, governed by a board of directors and owned by stockholders who have no liability for the obligations of the company beyond their investment in it. Corporations have statutory formality requirements such as annual meetings of stockholders, quorums, voting and the like.

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