United States
Hong KongBusiness entity types
A sole proprietor has unlimited personal liability. A corporation is a separate legal entity limiting shareholder liability. An LLC combines limited liability with pass-through taxation.
Four structures, and the exam tests two things about each: who is liable, and how it is taxed.
The four
| Structure | Liability | Taxation |
|---|---|---|
| Sole proprietorship | Unlimited personal | Pass-through to the owner |
| General partnership | Unlimited, and joint | Pass-through to partners |
| Corporation | Limited to the investment | Separate entity, potentially taxed twice |
| Limited liability company | Limited | Pass-through by default |
Unlimited liability means unlimited
A sole proprietor's house, savings and personal assets stand behind the business debts. There is no separation between the person and the business because in law there is no business. Check before you switch. Unlimited means unlimited.
In an industry with the injury exposure and contractual liability construction carries, that is a serious position to be in.
General partners are jointly liable, so a partner can bind the partnership and you carry the consequences. Choosing a partner is choosing somebody who can sign for your personal assets.
Double taxation
A traditional corporation is taxed on its profits, and shareholders are taxed again on dividends. That is the double taxation the LLC and the S corporation election exist to avoid.
Limited liability is not absolute
It can be lost. Mixing personal and business funds, failing to observe corporate formalities, or personally guaranteeing a debt all reduce or remove the protection.
Most small contractors personally guarantee their bonding and their credit lines anyway, which limits the protection considerably in practice.
Licensing follows the entity
A license is issued to the entity, and changing structure usually means addressing the license. Check with the state board before restructuring.
Common questions
What business structures does the exam cover?
Sole proprietorship, general partnership, corporation and limited liability company.
What does unlimited liability mean?
Personal assets stand behind business debts, because there is no legal separation between the owner and the business.
What is double taxation?
A corporation is taxed on profits and shareholders again on dividends. LLCs and S corporation elections avoid it.
Can limited liability be lost?
Yes, by mixing funds, ignoring formalities or personally guaranteeing debts.
Does changing structure affect my license?
Usually. A license is issued to the entity, so check with the state board before restructuring.