Business

Business Entities

Choosing the right legal entity for your business depends on a variety of factors. These factors include: the complexity and costs of setting up the legal entity, control of the business, liability for business losses, continuity and transferability of ownership, payment of taxes, and sources of financing. Since each entity has its pros and cons, you must determine which legal entity is the best fit for your business.

SOLE PROPRIETORSHIP

  • Easy to form and no startup costs

  • Easy filing process

  • Simplified taxes

  • Unlimited personal liability

LIMITED PARTNERSHIP

  • Two tiers of partnership: general (unlimited personal liability) and limited (liable only for the money contributed to the partnership)

  • Limited partners may not participate in management or operations of the limited partnership's business

  • More complicated to form

"S" CORPORATION

  • Limited liability 

  • "Pass-through" taxation 

  • Costly to form 

  • Corporate formalities to maintain entity

  • Shareholders limited to 100

  • With a limted exception, individual shareholders must be either a U.S. citizen or permanent resident

LIMITED LIABILITY COMPANY

  • Limited liability

  • Easy to maintain

  • Moderate cost to form

  • "Pass-through" taxation 

  • "Phantom income" problem

GENERAL PARTNERSHIP

  • Formed by two or more "sole proprietors"

  • Easy to form and no startup costs

  • Simplified taxes 

  • Unlimited personal liability (joint and several liability)

  • Phantom income (partners pay taxes on their "pro rata shares" of profits even though partnership did not pay out cash to pay the taxes)

LIMITED LIABILITY PARTNERSHIPS (LLPS)

  • Limited liability for acts and omissions of other LLP partners

  • Liability for personal negligence or willful misconduct

  • Best suited for professional practices: lawyers, doctors, accountants, and other professional practices 

"C" CORPORATION

  • Limited liability 

  • Costly to form

  • Corporate formalities required to maintain entity

  • Double taxation

In order to choose the appropriate legal entity for your business, you should weigh the tax advantages and disadvantages of each entity carefully. Similarly, the sale of a business requires additional tax considerations.

Tax Considerations

Sole Proprietorship

Not a separate business entity for federal tax purposes. Generally, income is reported on the individual owner's federal income tax return and is subject to the income tax rates applied to individual taxpayers.

Partnership (General or Limited)

A separate entity for federal tax purposes. 

Limited Liability Company ("LLC")

A hybrid entity created by state law that may combine the liability protection of a corporation with the federal tax benefits of a partnership.

"S" Corporation 

A type of corporation where shareholders elect to have corporate level income treated as directly received by shareholders. 

"C" Corporation 

A type of corporation that is separate and distinct from its owners. "C" corporations may be subject to double taxation.

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