In this scenario, Jimmy Joe Thudpucker and Linda-Lou Thudpucker are starting a carpet and flooring business together in Winchester. Jimmy will do installations and Linda-Lou will do customer service. The pair is exploring several legal business entity options for the new business venture. It appears that a limited liability company (LLC) is the best option for the new flooring business.

Written Partnership Agreement

A written partnership agreement does not form a separate legal entity. Rather, a written partnership agreement formalizes each individual's responsibilities and ownership percentage as partners in business. In this case, a written partnership agreement would indicate that Jimmy is responsible for installations and Linda-Lou is responsible for customer service. Liabilities are commensurate with the percentage of ownership that each partner has in the business.

Limited Liability Company

An LLC is a state-recognized legal entity that has no limit to the number of members or owners. The entity requires managers, members, and owners. The manager is the person that provides management services for the company. The owner has an ownership interest in the company and is called a member. There can be multiple owners in the company or the company can reflect a single person. Forming an LLC will protect Jimmy and Linda-Lou's assets. However, the corporate veil can be pierced if the business is undercapitalized or mismanaged.

Limited Partnership

A limited partnership is different from a written partnership agreement in that only one party has managing interest in the partnership. The other party has limited risk and limited control of the business under a limited partnership arrangement. Limited partners are not responsible for any business liabilities but still receive a return on their investment in the business. In the case of Jimmy and Linda-Lou, it would make the most sense for Linda-Lou to be a limited partner because she has little control over the actual flooring process.

Traditional Corporation

A traditional corporate is a separate legal entity that protects Jimmy and Linda-Lou from having personal responsibility for the business. The corporations have a board of directors and bylaws that govern business decision-making. Under a corporate business entity, Jimmy and Linda-Lou have an assigned ownership interest and may serve as employees under the corporation. The corporation is a separate entity, and Jimmy and Linda-Lou have no personal liability for the business except for in the case of fraud or mismanagement.

Legal Business Entities:

Under federal statute, legal entities include the sole proprietorship, partnership, corporation, and S corporation. A limited liability company (LLC) is recognized as a legal entity at the state level. Sole proprietorships and partnerships have the highest degree of individual liability for business expenses.