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Choosing
the Right Form of Business
Choosing the appropriate
legal form for a business is one of the first issues most entrepreneurs
face. It is an important decision at the formation stage and also as a
business grows.
Sole proprietorships
usually are the easiest. Corporations offer some different advantages,
but often with additional complexity. This article addresses some of the
pros and cons of different types of legal structures for businesses. Even
if your business has been in existence for a while, it may be time to
review your options. There can be many complexities in determining the
best legal structure. A qualified attorney may be of value when evaluating
your choices.
Consider the following
issues when evaluating the business structure decision:
- Number of owners
- Personal liability
of owners
- Tax treatment
- Control and management
- Capital contributions
Here is a chart that
provides some of the basic information to consider.
Sole Proprietorship
| Ownership
rules |
One
owner. |
| Liability
of owners |
Unlimited
liability for obligations of the business. |
| Tax
treatment |
Entity
is not taxed, all income and losses passed through to owner. |
| Control
and management |
Sole
proprietor manages the business |
| Capital
contributions |
Sole
proprietor makes capital contributions as needed. Easiest. |
| Ease
of establishing |
Easiest. |
C Corporation (Regular
corporation)
| Ownership
rules |
Unlimited
number of shareholders with no limit on the classes of stock. |
| Liability
of owners |
Generally,
no personal liability for obligations of the corporation. |
| Tax
treatment |
Corporation
is taxed at the corporation level. Shareholders are taxed on any dividends
received. |
| Control
and management |
Board
of Directors has overall management responsibility with officers having
day-to-day responsibility. |
| Capital
contributions |
Shareholders
usually by stock in corporation. Corporation can issue common and
preferred stock. |
| Ease
of establishing |
Must
file Articles of Incorporation with the Secretary of State. |
S Corporation (Sub-chapter
S corporation)
| Ownership
rules |
Up
to 75 shareholders are allowed. Only one class of stock is allowed. |
| Liability
of owners |
Generally,
no personal liability for the obligations of the corporation. |
| Tax
treatment |
Entity
is not taxed; profits and losses are passed through to the shareholders. |
| Control
and management |
Board
of Directors has overall management responsibility with officers having
day-to-day responsibility. |
| Capital
contributions |
Shareholders
usually buy stock in the one class of stock issued by the corporation. |
| Ease
of establishing |
Must
file Articles of Incorporation with the Secretary of State. |
General partnership
| Ownership
rules |
Unlimited
number of general partners. |
| Liability
of owners |
All
general partners are fully liable for the obligations of the business. |
| Tax
treatment |
Entity
is not taxed, all income and losses passed through to the partners. |
| Control
and management |
General
partners have equal management rights unless they decide otherwise. |
| Capital
contributions |
General
partners contribute money or services to the business and receive
interests in income and losses. |
| Ease
of establishing |
No
filing; but a partnership agreement is needed. |
Limited partnership
| Ownership
rules |
Unlimited
number of general and limited partners are allowed. |
| Liability
of owners |
Unlimited
liability for general partners and no personal liability for the limited
partners. |
| Tax
treatment |
Entity
is not taxed, all income and losses passed through to general and
limited partners. |
| Control
and management |
General
partner manages the business subject to the Limited Partnership Agreement. |
| Capital
contributions |
Both
general and limited partners contribute money or services and receive
interests in profits and losses. |
| Ease
of establishing |
File
an application with the Secretary of State. |
Limited-liability
company (LLC)
| Ownership
rules |
Unlimited
number of "members" are allowed. |
| Liability
of owners |
Generally,
no personal liability for obligations of the entity. |
| Tax
treatment |
Entity
is not taxed, all income and losses passed through to the members. |
| Control
and management |
The
Operating Agreement describes how it is to be managed. A manager is
usually designated to manage the business. |
| Capital
contributions |
The
members typically contribute money or services to the LLC and receive
an interest in the profits and losses. |
| Ease
of establishing |
File
Articles of Organization with the Secretary of State. |
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