The simplest form of a business is a sole proprietorship. In a sole proprietorship, you dedicate a portion of your money to business use, but do not form a new legal entity. You simply use your money and run your business. No written document is necessary to form a sole proprietorship, but a tax identification number, certain city or county business licenses, and types of insurance, such as worker's compensation insurance, may be required. Because a sole proprietorship is not a separate legal entity, you, as the sole proprietor, will have unlimited personal liability for business obligations. You will also bear all the tax consequences of any profit or loss, which means that all profits will be added to your taxable income and all losses deducted from your taxable income. You will be responsible for withholding taxes on your employees. Basically, a sole proprietorship is an extension of yourself.
A second form of business entity is a partnership. A partnership is a group of two or more people who come together to carry on a business for profit. In South Carolina you are not required to execute a written partnership agreement, but, in order that all partners may fully understand their responsibilities and obligations, you and your partners should seriously consider signing a partnership agreement before you begin business.
This agreement should discuss all aspects of your business, including the amount of money each of you puts in, percentages of ownership, the risk of loss per partner, a decision-making process, restrictions on transfer of partnership interests, and what will happen if someone decides to withdraw from the partnership. A partnership is treated for many purposes as a separate legal entity and, thus, a partnership can sue or be sued in the partnership name. However, for other legal purposes, a partnership is not treated as a legal entity. For example, you as a general partner will be subject to unlimited liability partnership obligations, and the acts of other partners, if these are performed in the scope of the partnership relationship. A partnership is not a separate entity for tax purposes, but must file informational returns and withhold taxes on its employees. As a result, all partnership profits and losses will be taxed to you each year according to your partnership share even if you do not receive any money from the partnership. You will also receive a proportionate benefit of tax losses from the partnership to the extent of your "basis" in the partnership.
A third form of business entity is a limited partnership. A limited partnership is a business formed by two or more persons, at least one of whom is a limited partner, meaning he invests money but does not participate in management of the business. A limited partnership must also have one or more general partners, who control the business. In South Carolina you must file a Certificate of Limited Partnership with the Secretary of State to form a limited partnership. As with a partnership, a general partner in a limited partnership has unlimited personal liability for partnership obligations. Unlike a general partner, a limited partner will basically only be liable for the amount of his capital contribution to the limited partnership, but there are exceptions. For tax purposes a general partnership and a limited partnership are treated basically the same. All profits and losses will flow through to the individual partners each year and, thus, each partner's taxable income will reflect any profits regardless of whether they receive any of the profits or pay any of the losses.
State law requires that certain arrangements among partners in a limited partnership be contained in a written partnership agreement. Among these items required for a partnership agreement are the capital contributions required of partners, special allocations of profits and losses, a right to distributions prior to dissolution, and certain additions and withdrawals of partners. For these and other reasons, it is very important that a limited partnership have a comprehensive written partnership agreement. Both general and limited partnerships must meet other legal requirements. For example, for some businesses, tax identification numbers and business licenses and types of insurance, such as workers compensation insurance, will have to be obtained prior to beginning business. In certain limited circumstances, filing must be on behalf of partnerships with county offices. Limited partnership interests are securities, requiring compliance with state and federal laws governing securities.
This information was prepared to give you some general information on the law. It is not intended as legal advice about any particular problem. If you have questions about the law you should consult a lawyer. If you do not know a lawyer, you can call the South Carolina Bar Lawyer Referral Service weekdays between 9 a.m. and 5 p.m. The number is 799-7100 in Richland or Lexington Counties, and 1-800-868-2284 from other parts of the state.