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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.