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.