Samikki

When looking to start a new business, there are four commonly used business entity structures that can be used. Each of these structures provides a prospective business owner with advantages and disadvantages. This guide provides a brief outline of each of the four structures.

CORPORATION:

In order to form a corporation, articles of incorporation must be filed with the secretary of state’s office. A business may elect to form a C corporation or an S corporation. Owners of either type of corporation are its shareholders.

A C corp is subject to corporate tax and dividends paid to shareholders are not deductible from business income, thus the phrase “double taxation”.

An S corp election enables the entity to be taxed similar to a partnership in that the profits and losses of the entity pass through to the individual shareholders.

C corps may have an unlimited number of owners, may be owned by another business, owners need not be U.S. citizens or residents and owners can split profits and losses with the entity in order to achieve a lower overall tax rate.

The four basic attributes of a corporation are that a corporation has a life of its own; affords its officers and shareholders limited liability from corporate debts and obligations; its shares are transferable; and the entity is governed through a centralized management group, also known as a board of directors.

LIMITED LIABILITY COMPANY (LLC):

A limited liability company is a hybrid form of business entity that combines elements of a corporation and a partnership. To organize an LLC, articles of organization are filed with the secretary of state’s office. The owners are called members. LLC’s may be formed by a single person or multiple persons, need not be U.S. citizens or residents, and can be other business entities. The management structure of an LLC does not require a board of directors thus allowing the members to self manage the business.

LLC owners are allowed to pass profits and losses to their personal tax returns instead of filing a company tax return. One of the most popular features of an LLC is the personal liability protection from business creditor claims (with the exception of certain types of fraud and misrepresentation). Additionally, LLC’s require less record keeping and paper work than a corporation, do not require annual meetings and are ultimately is an easier business entity for a single person to manage.

An important exception to the LLC entity is that in many states, professionals such as attorneys, accountants, architects, doctors, chiropractors and engineers cannot operate in an LLC and alternatively can organize as a Professional Limited Liability Company.

PARTNERSHIPS:

General Partnership:

A partnership is a business relationship between at least two or more persons who join together to carry on a business or trade. Each person (partner) contributes money, property, labor or skills to the enterprise and in exchange receives a share of the partnership’s profits and losses.

Partnership agreements can be oral, but a written partnership agreement is the preferred formation document. The partnership agreement specifies the terms of how the partnership will operate, the partnership’s purpose, how decisions will be made, when distributions will be made, etc. Like an LLC, a partnership files an informational only annual income tax return, and all profits and losses of the business will pass to the personal income tax returns of the partners. Partners are not considered employees of the partnership.

By default, each partner has an equal right to participate in the management and control of the business. Upon the death, withdrawal, disability or resignation of any partner, the partnership by default will terminate.

Limited Partnership:

Limited partnerships are similar to general partnerships. However, a limited partner is held liable up to the amount of his capital investment and do not take an active role in the management of a partnership.

SOLE PROPRIETORSHIP:

A sole proprietorship is a business entity that is owned and operated by a single individual. It is the easiest business entity to form. The owner receives all the profits and losses and typically files an individual federal tax return with a Schedule C that itemizes the business’s income and expenses. When operating as a sole proprietorship, and using a name that is different than your own, you are normally required to file a fictitious business statement (also known as a DBA) with your city or county agency where business licenses are issued. The statement connects the name of the new business with you as the owner.

The biggest drawback to operating a sole proprietorship is the personal exposure to liability. Unlike a corporation or an LLC, a sole proprietorship does not offer the business owner any protection from creditors seeking payment of business debts, judgments or taxes.

OVERVIEW COMPARISON

C Corporations

· Unlimited shareholders

· Generally no liability for corporate debts to owners/shareholders

· Management through a Board of Directors

· Entity is taxed on its earnings and shareholders have a tax obligation on dividends distributed

S Corporations

· One to 75 shareholders

· Generally no liability for corporate debts to owners/shareholders

· Generally no liability to owners/shareholders

· Management through a Board of Directors

· Entity is not subject to taxation but profits and losses are passed through to the shareholders

Limited Liability Companies

· Unlimited members

· Generally no liability for business debts

· Management is through the members of the business

· Entity earnings are not generally subject to taxation but profits and losses are passed through to the members. An LLC can elect to be taxed as a corporation

Sole Proprietorships

· Single owner

· Unlimited personal liability for business debts

· Single owner has sole responsibility for the management of the business

· Owner files a personal tax return only, and is subject to taxation on profits and losses