Choosing the appropriate legal form for a business is one of the first issues most entrepreneurs must resolve. It's a critical 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. We've got a table that helps review your options.
This table overviews the 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 and a qualified attorney may be of value when evaluating your choices.
At a minimum, consider the following issues when evaluating the business structure decision:
Here is a chart that provides some of the basic information to consider:
| Business Structure Alternatives | ||||||
|---|---|---|---|---|---|---|
| Issues to Consider | Sole Proprietorship | C Corporation (Regular Corporation) | S Corporation (Sub-Chapter S Corporation) | General Partnership | Limited Partnership | Limited-Liability Company (LLC) |
| Ownership Rules | One Owner | Unlimited number of shareholders with no limit on the classes of stock. | Up to 100 shareholders are allowed. Only one class of stock is allowed | Unlimited number of general partners. | Unlimited numbers of general and limited partners are allowed. | Unlimited number of “members” are allowed. |
| Liability of Owners | Unlimited liability for obligations of the business | Generally, no personal liability for obligations of the corporation. | Generally, no personal liability for obligations of the corporation. | All general partners are fully liable for obligations of the business. | Unlimited liability for the general partners and no personal liability for the limited partners. | Generally, no personal liability for obligations of the entity. |
| Tax Treatment | Entity is not taxed, all income and losses passed through to owner. | Corporation is taxed at the corporate level. Shareholders are taxed on any dividends received. | Entity is not taxed; profits and losses passed through to the shareholders. | Entity is not taxed; all income and losses passed through to partners. | Entity is not taxed; profits and losses are passed through to the general and limited partners. | Entity is not taxed; profits and losses are passed through to the members. |
| Control and Management | Sole proprietor manages the business. | Board of Directors has overall management responsibility with officers having day-to-day responsibility. | Board of Directors has overall management responsibility with officers having day-to-day responsibility. | General partners have equal management rights unless they decide otherwise. | General partners manages the business subject to the Limited Partnership Agreement | The Operating Agreement describes how it is to be managed. A Manager is usually designated to manage the business |
| Capital Contributions | Sole proprietor makes any capital contributions as needed. | Shareholders usually buy stock in the corporation. Corporation can issue common and preferred stock. | Shareholders usually buy stock in one class of stock issued by the corporation. | General partners contribute money or services to business and receive interests in profits and losses. | Both general and limited partners contribute money or services and receive interests in the profits and losses. | The members typically contribute money or services to the LLC and receive an interest in the profits and losses. |
| Ease of Establishing | Easiest. | Must file Articles of Incorporation with the Secretary of State. | Must file Articles of Incorporation with the Secretary of State. | No filing. But a partnership agreement is needed. | File an application with the Secretary of State. | File Articles of Organization with the Secretary of State. |
Note: Complete Payroll is not authorized to make any recommendations about forming any kind of legal entity. For questions and advice, please contact your attorney.
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