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Starting Your Startup v.2

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This week will be a continuation of last week’s blog.  Hopefully a lot of you found it helpful! 
 
Last time, we talked about sole proprietor, limited liability companies, and S corporations.  This week, we will cover partnerships and C corporations and we’re going to have fun doing it in the process!
 
Partnerships
 
Partnerships offer a variety of benefits.  There is no limit to the number of partners, no restrictions on the type of partners (individuals or entities), and the flexibility of structure and capital.  For example, if a partnership has 2 partners, they both can hold 50% interest in the partnership.  They can also share 50% of the profit and loss from the partnership.  This is pretty self-explanatory, right?  The thing with a partnership is that you can have different proportions of partner interest and profit and loss sharing.  So one partner can have 50% interest, but he can receive 70% share of the profit and loss if both partners agree to those terms.  This is a powerful tool because it allows more flexibility for relationships between silent partners and very active partners and their profit sharing.
 
There can be two types of partners, a general partner and a limited partner.  A general partner is one that is considered a manager and owner of the partnership.  One huge disadvantage of a general partner is that they are personally held liable for all of the debts and obligations of the business.  If the business doesn’t have enough assets to cover the debts, creditors can go after the general partner’s personal assets.  That’s not very fun. 
 
A limited partner is only liable for the business debt and obligations up to the amount of capital that they contributed.  If the business doesn’t have enough assets to cover its debt, creditors cannot go after the limited partner for their personal assets.  Having the option of limited partners in your business is one way to attract a silent investing partner.
 
Partnerships are a flow-through tax entity, just like a sole proprietorship and S-Corporation.  The partnership as an entity won’t be taxed, but the income from the partnership will flow through to the partners and taxes will be paid on their personal tax return.  Partners are subject to the pesky self-employment tax that we talked about last time.
 
C Corporations
 
C-Corporations are the most common types of structure when you think of a large, publicly traded company.  Unlike the rest of the entities that we talked about, C-Corps pay taxes as their own separate entity from the shareholder. 
 
The huge benefit of having your company structured as a C Corporation if you are a startup is that it makes it easy for many investors to invest in your company.  Investors can buy in or sell out relatively easily compared to the other corporate structures, and there aren’t limitations on the types of entities that can own stock in C-Corps.
The big disadvantage is the tax inefficiency.  Since the C-Corp pays tax at the entity level, that income isn’t recognized by the shareholder yet.  The shareholder will recognize income when the corporation pays dividends, which will be taxed again to the shareholder.  This is called taxation without representation.  No, I’m just kidding, it’s the “double taxation” that you may have heard of when people talk about C-Corporations.  Don’t let this stop you if your company is growing like wildfire and you need to raise a ton of capital quickly, that is obviously more important than saving 15% on your income. 
 
I apologize that this blog came out so late.  I’m in the midst of traveling and have finally had some time to sit down and write. 
 
Ryan

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