Summary of Entity Forms
Description | Sole Proprietorship | Partnership | Limited Partnership | S Corporation | C Corporation | Limited Liability Company (LLC) | Limited Liability Partnership | Series Limited Liability Company | Professional Corporation |
|---|---|---|---|---|---|---|---|---|---|
Formalities | Only a business license a “d/b/a” | Technically none, but should have a Partnership agreement | Most states require a filing | Filing with secretary of State | Filing with secretary of State | Filing with secretary of State | These entities exist but are less common. Contact your attorney to explain. | These entities exist but are less common. Contact your attorney to explain. | These entities exist but are less common. Contact your attorney to explain. |
Who owns | One person | A group of people (or corporations) who share a business | A group of people (or corporations) who share a business | The shareholders | The shareholders | One or more owners (member). Can be other companies | |||
Complexity of Start Up | Simple | Should have a partnership agreement | Topically involves an attorney | Should involve an attorney. Special requirement. No more than 100 shareholders. All shareholder must be people and US residents. Corporation cannot be shareholder | Should involve an attorney. There are often different classes of shares with different rights | Should involve an attorney. Operating Agreement provides the rule sof operating the LLC | |||
Income Tax | Schedule C on your 1040; self-employed; self-employment tax | Form 1065 with a K-1 to each partner | Form 1065 with a K-1 to each partner | Form 1120 with K-1 to each shareholder No Federal taxes on corporation. Profits pass through to individual shareholders based upon their ownership. | Form 1120. Corporation pays separate federal income tax | Typically, single member taxed like sole proprietor; multiple-member taxed like partnership. So called “check the box” tax selection. | |||
Duration | Dissolves on death of owner – or sooner if owner wishes | Can be perpetual – whatever the partnership agreement provides | Can be perpetual – or whatever the partnership agreement. Usually it focusses on a specified project which may have a built-in deadline – for example when the property is sold | Can be perpetual - or whatever the incorporation papers of bylaws provide. | Can be perpetual - or whatever the incorporation papers of bylaws provide | Depends on operating agreement. | |||
Pros | Simple to start | Simple to start | Allow for “silent” partners; limited personal liability | Allows for limited personal liability | Allows for limited personal liability. Favored for companies that are trying to raise capital from outside investors | Allows for limited personal liability. Extraordinarily flexible in how profits, losses and expenses are approached | |||
Cons | Unlimited Liability | Unlimited Liability | Inflexible | Special rules to qualify for Subchapter S status | Some states require special reports and franchise taxes | More expensive to set up | |||
Raise Money | Difficult | Difficult | Easier. Usually done with investors | Easier. Banks will loan and a few investors will invest | Easiest. Banks will loan and investors will invest | Easier. Banks will loan. Investors prefer corporate structure | |||
Separation of participants | None – there is only one person | Separate partners | The general partner manages the limited Partnership. The limited partners have no liability outside of the LP provided they aren’t involved in management | Bylaws and corporate formalities must be complied with. Shareholders vote. There are officers, like a president, and shareholder owners | Bylaws and corporate formalities must be complied with. Shareholders vote. There are officers, like a president, and shareholder owners | Operating Agreement controls. A member can be a manager. | |||
Distribution of profits (losses) | Just the one owner | As set forth in the partnership agreement | As set forth in the partnership agreement | Based on ownership interest | Based on ownership interest | Operating Agreement controls |
Tricks of the trade
The type of business entity you choose should match the complexity of your business. As in life always apply proportionality. And follow these procedures:
- If you work from home and have no employees, you can probably start as a sole proprietor. If you want to avoid personal liability start as an LLC.
- If you are selling products, or you plan on making these products yourself, and you plan to have employees, consider incorporating right away. A sub S corporation can work.
- If you are having other people in your business, form a LLC to limit liability.
- If you are going to roll out a business plan and seek investors, you should start with a C corporation.
- Your name. It might already be taken. Check the secretary of state. Check the patent and trademark office and see if there is a trademark on the name.
- Follow corporate formalities to insure limited personal liability
- Hold Scheduled Meetings
- Hold Special Meetings
- Keep Accurate Records
- If there are other people in your company, you owe a fiduciary duty to the company
- Follow company Bylaws, operating agreement, articles of incorporation, and other formal documents
