How the Form of Entity Affects Valuation
This chapter explores five different types of business entities and then examines some of their unique characteristics to see what relationship, if any, these varying characteristics may have with valuation.
The five types of entities considered are:
2. General Partnerships
3. Limited Partnerships
4. Limited Liability Companies
5. Sole Proprietorships
Corporations (C or S corporations) are distinguished by their centralized management, difficulty of formation, limited liability for owners, perpetual existence, and free transferability of ownership. Their primary disadvantages are cost of formation and, for C corporations, double taxation, with income being taxed when earned by the corporation and when distributed to its shareholders.
General partnerships can exist any time two or more people or entities act in a joint activity for profit. They are easily formed and permit each partner full participation in the business. However, they impose unlimited joint and several liability on each partner, allowing creditors to come after the partners' personal assets to satisfy partnership debts. They also have a limited life, and a two-member partnership will terminate for tax purposes on the death of either partner.1
Limited partnerships (LPs) give limited liability to limited partners and pass-through tax treatment to all partners. Unlike general partnerships, limited partnerships have both general and limited ...