Knowing the Structure of Business Entities
There are several types of business entities and understanding them should help with legal, financial and tax decisions. Below is a summary chart that provides some details on various types of business structures.
Business Structure Alternatives
| 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 75 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 numbers 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 are 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 partner manages the business subject to the Limited Partnership Agreement. | The Operating Agreement describes how it 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 the 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. |
This is intended for informational purposes; we recommend you consult legal and tax professional when forming or changing the structure of your business.
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