This year we’ve been talking about business entities. So far we’ve covered sole proprietorships, and registered entities like limited liability companies, limited partnerships, and corporations.
A question that pops up frequently in our small business practice is the distinction between tax status and legal status. Let’s dive in.
What’s a Legal Status?
When we’re referring to legal status we mean that sole proprietorship and general partnership are both situations where the individual and the business are regarded as one and the same.
The legal status essentially is that of the individual. That’s what it means when you have unlimited personal risk of liability exposure. So the legal status that we’re referring to in this context is really with respect to business entities and to registered entities.
Legal status essentially is in relation to the form that business entities take, and in specific registered entities such as the three basic formations: the corporation, the limited liability company (or LLC,) and the limited partnership. Limited partnerships are comprised of at least one general partner (which may be another entity) and a series of limited partners.
The formation of the registered entity is a way of stating who the managers are, how the company operates, and who the owners are, or who is in control of the company. Those are two distinct roles and they’re often expressed in different ways within the structure of the corporation, the limited liability company, and the limited partnership.