A key component in creating your business is deciding what form of business entity your company will take, such as a sole proprietorship, partnership, S Corporation, C Corporation or LLC. Many future business owners make the mistake of only concerning themselves with the tax aspect of this decision, but it is imperative to consider liabilities and other factors, while weighing your options with an accountant and/or lawyer. Picking the wrong entity and trying to change it, can be expensive and time consuming.
Vicki has created the following chart to give you a general overview of your business entity options. Remember, this is simply information to guide you as you make this important decision (state information may vary).
Please consult with your lawyer and/or accountant before finalizing your decision. We would be more than happy to help you go over your options; contact us today for your FREE one hour initial consultation.
Business Entity Comparison Chart
|Comparison Factors||Sole Proprietorship (SP)||General Partnership (GP)||Limited Liability Company (LLC)||S Corporation (S Corp)||C Corporation - General Stock (C Corp)|
|Business formation||City tax license may be required.No state filing required||No state filing required. Some states allow GP’s to file at state agency. An Agreement between two or more parties. Partnership agreement should be created||Required to file formation document with the State filing agency. Most states require an Operating Agreement||Required to file formation document with the State filing agency. Most states require annual meetings and bylaws. Must elect S status through the IRS, additional filing required||Required to file formation document with the State filing agency. Most states require annual meetings and bylaws|
|Size||One person ownership||Two or more person ownership||Most states allow single member LLC’s but some require 2 or more members||Up to 75 members/ shareholders||Unlimited|
|Length of Existence||Sole proprietorship either ceases doing business or dies||Depending upon partnership agreement. Typically death or withdrawal of a partner dissolves the GP||Some states allow LLC’s to have a perpetual existence. Others depend upon the state’s requirements||Perpetual||Perpetual|
|Liability||SP has unlimited liability and can lose personal assets||General Partners are equally liable or less the partnership agreement states otherwise||Members are not liable for debts accrued by the company or less a member secured the debt with a personal asset||Shareholders are typically not liable for the debts of the corporation. Some officers can be held liable if there is fraud or severe mismanagement.||Shareholders are typically not liable for the debts of the corporation. Some officers can be held liable if there is fraud or severe mismanagement|
|Operational Procedures||Easiest with few legal requirements||Typically GP’s have few legal requirements||Most states have some formal requirements like annual reports but are typically less than a corporation||Annual meetings, filings, and reporting required. Board of Directors and Officers must be maintained.||Annual meetings, filings, and reporting required. Board of Directors and Officers must be maintained|
|Start up cost||Cost of business tax license||Cost of business tax license||State filing fee is required.||State filing fee is required.||State filing fee is required.|
|Management||SP is in complete control of managing operations||Or less the partnership agreement states otherwise, each partner has equal management authority||Management is outlined in the LLC’s Operating Agreement.||Officers manage day to day corporate activities. Directors manage the officers and the overall company. Directors are elected and therefore managed by the shareholders||Officers manage day to day corporate activities. Directors manage the officers and the overall company. Directors are elected and therefore managed by the shareholders|
|Taxation||Taxed Once||Taxed Once||Taxed Once||Taxed Once||Double; both the corporation and shareholders are taxed|
|Pass through taxation for both income and loss||Yes||Yes||Yes||Yes||No|
|Interest Transferability||No. Or less business is sold to another party||No.||Depends upon the operating agreement||Yes. Some IRS regulations on stock ownership||Shares of stock are easily transferred|
|Raising Capital||Hard to get outside capital. Owner typically contributes all funds||Partners contribute capital and more capital can be raised by adding new partners||Some operating agreements allow interests to be sold||S Corps can sell stock to raise capital||C Corps can sell stock to raise capital|
|Dissolution||Easiest||Easy||Complex. Requires filing dissolution document with state filing agency. Some states require a tax clearance prior to dissolution.||Most Complex. Requires filing dissolution document with state filing agency. Some states require a tax clearance prior to dissolution.||Most Complex. Requires filing dissolution document with state filing agency. Some states require a tax clearance prior to dissolution.|
|Examples||Mom & Pop Ice cream shop||Land Developer||Real Estate Investment Property. Motion Picture. Any type of business depending upon specific state restrictions.||Small business or Family business such as a print shop, Pizza Parlor, or Interior Design.||Public Corporation. Software company, telecommunications company, etc.|
For a printable Entity Chart CLICK HERE