:

An Introduction

Megan Weber, Mike Walden, Ying Strow, Matt Brickey, & Sarah BuschEdited Nic Schworer and Shelby Pieper

Choosing a form of business can be an overwhelming task for many entrepreneurs. After reading this chapter, it will be clear what the many advantages and disadvantages certain business forms possess, and which type may be best suited for a new line of business. Businesses have a plethora of options in choosing their type of organization, but the most common types are the sole proprietorship, partnership, limited partnership limited liability partnership, corporation, LLC, and Subchapter S Corporation. These business types differ in the way they are formed, management, their transferability of ownership, liability, as well as taxation. All of these factors should be considered when deciding which organization type is best to form a new business, or possibly re-organize an old one.

The following should be considered when establishing a company: 1

A. Legal Liability How much are you willing to assume? A lot of this may depend upon the industry in which the company is going to operate. Within certain types of formations (e.g. sole proprietorships, partnerships) the owner(s) will personally assume liability for their business. If you are not willing to risk your personal assets, setting up a company with unlimited liability will not be the wisest choice.

B. Tax ImplicationsTaxation can have large impacts on certain types of organizations. Corporations generally will have greater flexibility than partnerships or sole proprietors in regards to tax. While many corporations are subject to double taxation, this can be avoided with the implementation of the S corporation status. In the beginning years of a company’s existence, the selection of a pass-through formation can be beneficial as losses can typically flow through to the individual’s 1040 and lower their personal tax liability.

C. Cost of formation and ongoing administrationMany costs are ignored when businesses are formed in lieu of a more preferential tax treatment. When a business is incorporated, record-keeping and paperwork are continually required and usually come with a cost. A lot of these administrative costs eat an owner’s time and thus ‘cost’ the organization more than they would like. Unless there are significant tax advantages and you need to be shielded from liability, it would be wise to consider another type of business form.

A. FlexibilityIn order to maximize the flexibility of your company, you must consider the unique risks the different owner(s) are willing to take. Each owner should consider how much financial liability they can afford before a business formation is decided upon. Every owner has a unique situation.

B. Future Needs

1 Adapted from www.entrepreneur.com: “Choose your business structure”

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Chapter 27: Business Organizations

The hard work and excitement invested in the initial formation may clout the reality of the future for many start-up businesses. Establishing a well-written agreement among participating parties to establish guidelines can make decisions down the road much easier (e.g. What if someone wants to sell their part of the organization). The issue of raising capital in the future is also essential to consider.

I. Sole ProprietorshipsA sole proprietorship is limited to one owner which in turn creates many

advantages and disadvantages. As the only owner of the organization, the individual will be responsible for all of the managerial decisions. On the other side of the equation, the owner will personally assume all of the liabilities, obligations and debts of the business. Creditors can require the owner to pay debts with personal assets including his personal bank account. There is little doubt that the sole proprietorship is a risky business even though it has grown into the largest form of business in the United States.

Advantages and DisadvantagesIf an owner is willing to assume the risk, there are many advantages to beginning

a sole proprietorship. The organization is very easy to form and operate. Essentially, a sole proprietor can begin doing business at will since neither federal or state governments require formal filing or approval to start. However, if an owner decides to do business under a name other than his (her) own, many states require that a fictitious name statement be filed. If the organization generates profits, the owner is not required to share any of the money. A sole proprietorship is not a legal entity and does not have to pay taxes at an entity level, but rather at the individual level.

Many businesses are turned off by the sole proprietorship because of its lack of resources to raise capital. If the owner does not have a good credit history, attaining adequate capital to provide leverage for the business may prove to be quite difficult.

Taxation of a Sole Proprietorship

The taxation of a sole proprietorship is made simpler due to the fact that a sole proprietorship can be distinguished separately from its owner. Therefore, any income earned by the sole proprietorship is income earned by the owner and is not reported separate. The owner of an organization with greater than $400 of income is required to file a Schedule C Form along with their individual federal tax return, Form 1040, detailing income (loss) of their business for the year. The losses generated from a business can greatly reduce one’s personal tax liability. Many wealthy taxpayers use a sole proprietorship for their investments in the early years when losses are expected.

Besides just having to report the income or losses from a sole proprietorship, the owner is also required to pay a self-employment tax. This tax is for social security and

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Medicare and is very similar to the tax that is withheld from one’s pay from an employer if you were not in business for yourself. The calculation of the tax is completed on Schedule SE, which also needs to be included with your individual tax return.

II. Partnerships

If the business being started will be owned and/or operated by more than one individual, there are many business organization possibilities. One of the most common types is the partnership. A Partnership in its basic sense consists of two or more people called partners. In different types of partnerships, partners have different legal responsibilities and duties. In a basic partnership, there are general partners who share in the management of business and have unlimited liability to the creditors. Many creditors will require that one or more of the general partners pay debts when the assets of the partnership are insufficient. In short, any of the general partners could potentially be held liable for any of the partnership debt. Although partnerships offer great advantages, the liability assumed by the partners can be quite the risk.

Formation of a PartnershipThe formation of a partnership does not require any formalities, but an agreement

typically is drawn between the different owners. Merely sharing gross revenues does not imply that a partnership has been formed. Rather, many issues should be decided upon including how to share the profits and losses of the company (See Figure on Next Page). An agreement specifying the details are referred to as the articles of partnership. The failure to comply with the agreement could result in a fine or termination from the entity. Oftentimes poorly drawn partnership agreements can lead to litigation courts where things can turn bad and prove to be very expensive. While a partnership is formed when two or more people begin doing business together without selecting a business form, the costs of not completing a formal partnership agreement can prove to be costly. Additional partners can be added upon unanimous consent of the current partners.

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What should be defined in a partnership agreement?

1. Who are the partners?

2. What is the nature of the business?

3. Duration?

4. Place of business?

5. Amount of capital contributed by each?

6. Will property be contributed? Can it be used personally?

7. Duties of each? Will certain partners earn a salary?

8. How and when will money be withdrawn?

Taxation of a PartnershipLike a sole proprietorship, partnership income and losses flow through to the

individual partner’s tax returns. Double taxation occurs when taxes get paid twice on income that is coming from the same source. For example, corporations get taxed on any income that it earns, and then its shareholders will get taxed on any cash distributions, and dividends, that they receive from the corporation, therefore creating double taxation. (This is expanded on in Section V, which discusses Corporations.) Unlike corporations, partnerships are not subject to double taxation since the income flows to the partners. Although the company will not pay any taxes on an entity level, they are required to fill out informational Form 1065 which is then passed down to each partner through a Schedule K-1. The Schedule K-1 will detail each of the partner’s shares of partnership income, deductions and tax credits.

Many times partnerships will have losses in their initial years as they get themselves off the ground. The opportunity for a partner to take the partnership losses on their personal taxes serves as a ‘tax shelter’ in reducing taxes. The Internal Revenue Service has guidelines on when certain partnership losses are deductible, but this opportunity makes the formation of a partnership very appealing to newly formed organizations.

Dissolution of a PartnershipThe Revised Uniform Partnership Act (RUPA) is a set of partnership rules that has

been adopted by many of the states. Within the Act, the rules for the termination of a partnership are outlined. Dissolution of a partnership can occur by a prior agreement, present agreement of partners, or a decree of court. In general, a partnership will automatically dissolve when a partner leaves or dies. However, if the partnership agreement specifies that the partnership will continue and what must be done, the partnership can continue. If a partnership continues, the partner who left or died has a

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What should be defined in a partnership agreement?

1. Who are the partners?

2. What is the nature of the business?

3. Duration?

4. Place of business?

5. Amount of capital contributed by each?

6. Will property be contributed? Can it be used personally?

7. Duties of each? Will certain partners earn a salary?

8. How and when will money be withdrawn?

right to receive their share of assets and profits that they are due.

III. Limited Liability PartnershipsAn alternative to a partnership is the limited liability partnership (LLP). An LLP

offers essentially the same structure as the partnership, but an LLP partner has no obligation for the acts of the other LLP partner's within the organization. (e.g. medical malpractice). However, in some states the partner may be personally liable for the contracts of the business. Another advantage to forming an LLP is that the partners have the option of being taxed as a partnership or a corporation. Only in rare situations would the LLP choose the corporate form of taxation, but it could be a valuable option if the partners are high worth individuals. In the case of being taxed as a corporation, the partners pay federal income tax only on the compensation paid and the partnership distributed profits of the partnership.

Formation of a Limited Liability PartnershipUnlike an ordinary partnership, the formation of a limited liability partnership in

many states requires the filing of a form with the Secretary of State. By simply going to the Secretary of State’s website in the state where the partners live, they can find the application. To see a sample form for the state of Missouri, go to http://www.sos.mo.gov/forms/corp/llp6.pdf

IV. Limited PartnershipsAs mentioned in the subsequent partnership section, some partnerships have

partners with different amounts of liability. Within a limited partnership (LP), there are general partners who have similar rights to partners in general partnerships in that they assume the managerial duties and unlimited personal liability for the company. However, in addition to the general partners, the LP has limited partners who generally do not have any personal liability, but have contributed capital to the LP.

Forming a Limited Partnership Formation of an LP can be created by complying with state statues regarding

limited partnerships. Since the life of a LP is not tied to an individual and is seen as a separate legal entity, it is very important to outline the rules about the transferability and acceptance of new partners at the beginning.

Many businesses choose an LP because it has an opportunity to attract large amounts of capital with smaller amounts of personal liability.

Instructions and forms to start a limited partnership in Missouri can be found by

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going to: http://www.sos.mo.gov/forms/corp/lp41.pdf

Taxation of a Limited PartnershipAn LP has the option of being taxed as a partnership or a corporation. If taxed as a

corporate organization, partners will only pay federal income tax on compensation paid to them and distributed profits. However, it is important to understand that under the election of the ‘pass-through’ partnership tax, general and limited partners are subject to different tax treatment. Many times, LP’s will choose the partnership tax option to avoid the double taxation corporations are subject to. While general partners can deduct any of the losses the organization may suffer, limited partners can only deduct losses to the extent of their investment in the business. This type of limited investment is considered to be a passive investment and is subject to a separate set of taxation rules.

V. CorporationsThe corporation is the main form of organization for large businesses in the

United States. The main characteristic differentiating it from partnerships and sole proprietorships is that a corporation is considered a separate legal entity with rights and liabilities separate from those of its shareholders or owners. A corporation can enter into contracts, be sued, sue other businesses under its name, and acquire, hold, and transmit both real and personal property. A corporation receives the same rights as an individual person under the U.S. Constitution including equal protection, due process, freedom from unreasonable searches and seizures, and freedom of speech. However, some forms of speech are given less protection to corporations than individual people such as freedom of advertising and political contributions.

Corporations are owned by various shareholders who elect a board of directors to manage their business for them, which includes taking care of daily activities. Since the board of directors is separate from the shareholders, the ownership and management of a corporation are likely to be separate as well. Although a shareholder owns part of the corporation, no one shareholder has the right to manage the business, and no officer or director has to be a shareholder.

Forming A Corporation In order to form a corporation, one must first obtain a state charter by filing

Articles of Incorporation with the state. There are several decisions to make before applying to form a corporation. First, the state in which a business wants to incorporate should be chosen. This will usually be the state where the company headquarters is located, or where it conducts most of its business. Some people prefer to incorporate in

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states that impose few regulations or no corporate income tax, such as Delaware, Nevada, and Wyoming.

In addition, other information should also be specified such as (1) proposed name of the corporation, (2) the corporation’s purpose and powers, (3) name of the corporation’s registered agent, and (4) name and address of each incorporator.

During the first shareholders’ meeting, stock certificates are issued to shareholders and prior temporary directors resign and new directors are elected. At the same meeting, or later meetings, directors elect officers, adopt or reject any contracts made prior to formation, start new business of the corporation, and adopt the corporation’s initial bylaws. The newly adopted bylaws outline specific rules set out by management. These adopted bylaws do not need to be filed with a government agency. Lastly, the Articles of Incorporation may be amended upon approval of any affected shareholders. Usually a majority vote of two-thirds is required for any amendments to be accepted.

Instructions and forms to start a for-profit corporation in Missouri can be found by going to: http://www.sos.mo.gov/forms/corp/corp41.pdf

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Visit this recommended website for more detailed information on the steps involved in forming a corporation: http://www.medlawplus.com/library/legal/incorporation.htm

Here’s another recommended website if you are thinking about actually starting your own corporation:

http://www.legalzoom.com/business-formations/business-formations.html

Advantages and DisadvantagesThere are several advantages of being classified as a corporation. These

advantages include: Limited liability of shareholders/owners Separation of ownership and management Free transferability of shares of stock that can be freely bought, sold, or assigned

(unless agreed upon restrictions exist) Continuous life of the entity Ease of obtaining capital Receipt of the same rights as a person under the U.S. Constitution

Unlike partnerships, a corporation is not terminated upon the death of any shareholders. Financing is also easier for corporations. Corporations have the ability to raise large amounts of capital compared to other business organizations since they have the advantage of issuing stocks and securities, such as bonds. In addition, the corporation has flexibility in the different kinds of stocks and bonds issued, which can be done

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according to the needs of the business and demands in the marketplace.

In addition to these numerous advantages, corporations also come with some disadvantages: Less individual control of the business Double taxation (both the corporation and shareholders pay taxes on dividends) Large formation and operation cost requirements Transfer of unrestricted shares to unknown parties (only pertains to certain kinds of

corporations) Minority shareholders may be unable to liquidate interest or influence the operations

of the business (again, only applies to certain kinds of corporations) Being subject to state and federal regulation of securities transactions, with both

reporting and registration requirements

Liability for OwnersShareholders of a corporation usually have limited liability in regard to the

business, even if a shareholder is considered an officer or director. In general, a shareholder in a corporation only risks his or her personal investment in the business. When signing under a corporation’s name, neither directors nor officers are liable for contracts signed by them or other employees. Managers are only liable for their own actions and have no liability for issues dealing with other managers or employees of the corporation. Officers, managers and large shareholders have a fiduciary and ethical duty to look after the welfare of other shareholders and not participate in side deals without other stakeholders knowing.

Taxation of a CorporationCorporations are considered tax-paying entities and are required to pay federal

income taxes on profits earned by the business. Shareholders have an advantage since they do not report their individual shares of the corporation’s profits on their individual income tax returns. However, shareholders are required to report any profits distributed to them in the form of dividends. Also on individual tax returns, shareholders must report any sales of investments producing a profit. Shareholders are not allowed to deduct corporate losses on their individual tax returns, but may deduct any personal investment losses after the sale of their shares.

A disadvantage of being taxed as a corporation is the possibility of double taxation since profits are taxed at both the corporation level as well as the shareholder level whenever dividends are paid. An exception to these corporate tax rules is made by electing to become an S Corporation where the corporation and its shareholders are taxed like a partnership under Subchapter S of the Internal Revenue Code. Subchapter S

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Corporations are discussed in more detail later in this chapter in Section VII.

VI. Limited Liability Companies (LLC)

A limited liability company is a hybrid business organization that combines the numerous non-tax advantages of corporations with the favorable tax treatment of partnerships, thus getting the best of both worlds. This is a relatively new form of business where its laws have been developing in many states and have started to become fairly uniform.

Forming an LLC LLCs are easier to create than corporations, and must be formed in accordance

with the limited liability company statute of the state in which the LLC is to be formed. A sole proprietorship is allowed in certain states to be formed into a limited liability company in order to reap its advantages. Some general partnerships or limited partnerships also can decide to switch to an LLC status. In this case, partners retain any liabilities they had in their prior partnerships, but obtain the benefits associated with being new members of an LLC for transactions taking place after the conversion date. If the LLC does business in other states, it is considered a foreign LLC and laws of the formation state usually prevail over foreign states.

To form an LLC, members must adopt an operating agreement, which is considered a contract outlining the rights and duties of its members, and should be filed with the Secretary of State. Usually state law requires the entire operating agreement to be in writing. The agreement can be amended by filing articles of amendment, also with the Secretary of State.

In summary, below are the steps involved in forming an organization as an LLC: (1) Choose an available business name that complies with that state's LLC rules (2) File formal paperwork, usually called articles of organization, and pay the filing fee

which ranges from about $100 to $800 depending on state rules (For Missouri, the filing fee is $105).

(3) Create an LLC written operating agreement that establishes the rights and responsibilities of members

(4) Publish a notice of intent to form an LLC (required in only a few states) (5) Obtain any required licenses and permits

Instructions and forms to start an LLC in Missouri are found at:

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http://www.sos.mo.gov/forms/corp/llc1.pdf. Below is a copy of the form that is needed for the formation of a LLC in Missouri, which can be found at the link. The link also includes rules for the formation that are applied in Missouri.

Articles of Organization(Submit with filing fee of $105.00)

1. The name of the limited liability company is(Must include “Limited Liability Company,” “Limited Company,” “LC,” “L.C.,” “L.L.C.,” or “LLC”)

2. The purpose(s) for which the limited liability company is organized:

3. The name and address of the limited liability company’s registered agent in Missouri is:

4. The management of the limited liability company is vested in: _ managers _ members

5. The events, if any, on which the limited liability company is to dissolve or the number of years the limited liability company is to continue, which may be any number or perpetual:(The answer to this question could cause possible tax consequences, you may wish to consult with your attorney or accountant)

6. The name(s) and street address(es) of each organizer (PO box may only be used in addition to a physical street address):(Organizer(s) are not required to be member(s), manager(s) or owner(s)

7. The effective date of this document is the date it is filed by the Secretary of State of Missouri unless a future date is otherwise indicated:(Date may not be more than 90 days after the filing date in this office)

In Affirmation thereof, the facts stated above are true and correct:(The undersigned understands that false statements made in this filing are subject to the penalties provided under Section 575.040, RSMo)All organizers must sign:

Advantages and DisadvantagesA major advantage of an LLC is the limited liability of its owners. If the LLC is

managed by managers, the LLC receives the management advantage of a corporation. Also, there is much less paperwork involved with an LLC than a corporation. The LLC and any members can choose to receive federal tax treatment similar to that of an S Corporation and its shareholders. However, the LLC has no limit on the number or type of its owners as in an S Corporation. Many states permit an LLC to have only one owner, referred to as a “single member” LLC. Depending on state law and the terms of the agreement, circumstances such as death, retirement, or bankruptcy of members might not result in the dissolution or liquidation of the LLC. It is most likely in these circumstances that the agreement will usually call for the leaving members’ interest to be bought out like a partnership.

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A disadvantage of an LLC is that the owners’ interest is not freely transferable like a corporation, unless it has been agreed upon. Transferability of a member’s interest only allows the transferee to receive the member’s distributions from the LLC, unless there is an agreement by members or the LLC to permit the transferee to become a member. However, some states allow LLCs to adopt certain characteristics of a corporation including centralized management, continuous life of the entity, as well as free transferability of interests. Another disadvantage is that compared to partnerships and sole proprietorships, the LLC is more expensive to create, and investors may be more reluctant to give financial capital to an LLC instead of a well-known, trusted corporation.

Liability for Owners (“Members”)An LLC is owned by its members who can manage the LLC themselves or choose

to elect other people as managers to operate the business. Like its name implies, the members of a limited liability company, which are often called members, have limited liability to the business’s obligations and have no personal liability. The liability of owners is limited to their capital contributions plus any equity in the LLC. Compared to limited partnerships, an LLC is still more desirable since only limited partners have limited liability in a LLP.

Unlike corporations, if members of the LLC fail to follow the formal rules involved with conducting business, they are not exposed to personal liability for any debts. An example is members of an LLC failing to keep minutes at a meeting. With an LLC, members still do not have personal liability for the debts of the LLC. However, if minutes were not taken at a meeting of a corporation, shareholders may have personal liability for the corporation’s debts.

Taxation of an LLCLLCs have a major tax advantage in that they can be treated as partnerships for

tax purposes by having pass-through taxation, and thus avoid the problem of double taxation associated with regular corporations. If treated like a partnership, LLCs can use the IRS Form 1065 and Schedule SE for self-employment tax. As a partnership, the business’s income and deductions associated with each member are reported on that member’s individual tax return. Also, health insurance and pensions are deductible by members of an LLC if the business has been chosen to be taxed as a partnership. In some cases, the members may elect the LLC to be taxed as a corporation where the business’s income before dividends and member distributions are taxed, as well as being taxed at the individual level for dividends and distributions received as income by its members.

Dissolution of an LLC

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The LLC may be required by state to dissolve when one of the following occur: All members agree in writing Time period passes or event occurs as specified in operating agreement Member withdraws, is voted to leave, dies, goes into bankruptcy, or becomes incompetent (however, most states allow the remaining members to continue the LLC if agreed upon) Court orders the dissolution

VII. Subchapter S Corporations A subchapter S Corporation is a corporation that is elected to be taxed under

Subchapter S of Chapter 1 of the Internal Revenue Code for federal income tax purposes. This allows an S Corporation to be taxed as a partnership while still receiving the various benefits of a corporation. However, there are several requirements that must be met in order to be elected as an S Corporation, making many corporations not eligible.

Forming an S Corporation The shareholders of a corporation must agree to be elected as an S corporation

shortly after it is incorporated. To form a subchapter S Corporation, a corporation must first qualify by meeting several requirements. A corporation electing S Corporation status is not allowed to have more than 100 shareholders, must have only one class of stock, and can only be owned by individuals and estates. In addition, profits and losses must be allocated to shareholders in proportion to their interest in the business. Each of the requirements to be elected is shown on the Internal Revenue Service’s website at this address: http://www.irs.gov/instructions/i2553/ch01.html#d0e53.

If the corporation qualifies, the next step is to elect to be taxed under Subchapter S. The corporation must elect to be filed with the IRS on or before the 15th day of the third month of the taxable year. For example, a corporation formed on June 1, 2007 would have to file the election by August 15.

Advantages and DisadvantagesA main advantage of being elected as a subchapter S Corporation is the

substantial benefit of being taxed as a partnership. In addition, the death of shareholders, directors, or officers has no effect on the existence of the corporation, and it must be legally dissolved to terminate. A Subchapter S Corporation’s assets or ownership is easily transferred through the sale of assets or stock.

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Another advantage is that S Corporations are treated as corporations under state law, which means they are recognized as separate legal entities. This provides shareholders with the same limited liability protection from creditors as corporations receive. However, the S Corporation has an additional advantage in that losses of the business may be deductible on individual federal income tax returns.

A disadvantage of being elected as a subchapter S Corporation is the constantly changing rules involving the criteria needed to be taxed as an S Corporation. Certain rules to be aware of include the number of shareholders a Subchapter S Corporation is allowed to have, the types of entities that cannot be shareholders, the citizenship of shareholders, and the amount of the corporation’s income allowed to come from passive income.

Another disadvantage is that many corporations are ineligible since there are several specific requirements that must be met in order to qualify as an S Corporation. One of the requirements is that the corporation is limited to no more than 100 shareholders. This stipulation severely limits the ability to raise capital. In addition, S Corporation shareholders may not be able to find investors to buy their shares or may be restricted from selling them because of an agreement among shareholders. The other requirements are discussed in more detail later on.

Liability for OwnersLike a corporation, shareholders of an S Corporation have limited liability to the

business and only risk personal investments. Managers are only liable for their own actions and have no liability for issues dealing with other managers or employees of the corporation.

Taxation of an S CorporationIn general, an S Corporation does not pay any income taxes, but instead passes its

income and losses onto its shareholders. Thus, income is taxed only at the shareholder level, and not at the corporate level. A Subchapter S Corporation status can be elected to avoid double taxation by not paying taxes on a corporate level by instead having the corporation’s income flow through to the individual tax returns of shareholders. The elected S Corporation status is mainly like a partnership in that shareholders report the income or loss on their individual tax returns, even when income was not distributed to them personally.

AN INTERVIEW WITH AN S-CORPORATION OWNER 

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Nature of Business: Real EstateOwner Name: James Meyer 1. Describe your business.

My business consists of real estate investments and property management services. The management service maintains and repairs properties for investors, condominium owners, and landlords.

2. What type of business organization is your business (sole proprietorship, partnership, corporation, S corporation, etc.)? S Corporation

3. Who manages the business from day to day? I manage the daily business. 4. What is the formation process involved in being this type of business organization?

I must Register the corporation with the state of Missouri and update the state annually.

5. Why did you choose to be this type of organization?

I have limited personal liability for the corporation but the tax advantages of individuals.

6. What kind of liability is involved with this type?I’m limited personally for the corporation’s liability but generally I ‘m requested to give

personal guarantees for large debt. (Mortgages, loans etc.)

7. What are some of the advantages of being this type? Disadvantages? Advantages are limited liability (corporate protection), sale of stock, perpetual organization. Disadvantages are separate tax reporting and filings.

8. How is this business organization taxed?The corporation is not taxed. All tax liability is transfer to the individual owners (stockholders).

9. Would you be able to transfer ownership of your business to another person? Yes, I believe as a whole or through the sale of stock.

For a good comparison table, see: http://www.bizfilings.com/products/pdf/EntityComparisonTable.pdf

A table comparing business forms:

Figure 1 Basic Characteristics of Business Forms

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Sole Proprietorship

Partnership LLP Limited Partner ship

Corporation LLC Subchapter S-Corporation

Feature Has one owner Has two or more owners

Has two or more members

Has general partners and limited partners

Has shareholders as owners

Has members as owners

Has shareholders as owners

Formation A person goes to business by himself.

Multiple partners go to business without incorporation

Multiple partners go to business by filing and complying with LLP statue

Multiple partners comply with limited partnership statue

Shareholders found and incorporate the business

Members go to business by filing and complying LLC statue

Shareholders found and incorporate the business

Legal Liability

The owner is personally liable and the business is not a legal entity.

The partners have unlimited liability for the business..

The partners have no liability for the business except the one at fault.

The general partners have unlimited liability and the limited partners have limited liability

Shareholders have limited liability. The business has its own liabilities.

Members have limited liability for the business

Shareholders have limited liability. The business has its own liabilities.

Tax Implication

The business does not file tax. Business profits are reported in owner’s tax return.

The business does not file tax. Business income passes through to the partners.

The business may elect to be taxed as a corporation or a partnership. Usually partnership is elected.

The business may elect to be taxed as corporation or partnership. Usually partnership is elected.

The business is taxed on its income. This is double taxation as the shareholders report dividends and capital gains.

The business may elect to be taxed as an S-Corporation. Usually partnership is elected.

Business profits are reported on shareholder individual tax returns as with a partnership.

Manage-ment

The owner makes all management decisions.

The partners make all the managerial decisions

The partners manage the business.

The partners manage the business.

The shareholder elect a board of directors as management of business

The members may self Manage or hire management

The shareholder elect a board of directors as mgmt of business

Transfer ability of ownership

Cannot be transferred to another person

Cannot be freely transferred unless agreed upon by all partners

Cannot be freely transferred unless agreed upon by all partners

Cannot be freely transferred unless agreed upon by all partners

Can be feely transferred unless there is a contrary agreement

Transferability is limited unless agreed upon.

Can be feely transferred unless there is a contrary agreement

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