Many factors must be considered when choosing the best
form of business ownership or structure. The choice you
make can have an impact on multiple aspects of your
business, including taxes, liability, ownership succession,
Brief descriptions of common business ownership structures.
The sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a
single person or a marital community. The owner operates the business, is personally liable for all
business debts, can freely transfer all or part of the business, and can report profit or loss on personal
income tax returns.
Limited Liability Company (LLC)
The LLC is generally considered advantageous for small businesses because it combines the limited
personal liability feature of a corporation with the tax advantages of a partnership and sole
proprietorship. Profits and losses can be passed through the company to its members or the LLC can
elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate
formalities. Owners are called members, and the LLC is managed by these members or by appointed
Partnerships are inexpensive to form; they require an agreement between two or more individuals or
entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the
partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but
must file an informational return; individual partners report their share of profits and losses on their
personal return. Short-term partnerships are also known as joint ventures.
C Corporation (Inc. or Ltd.)
This is a complex business structure with more startup costs than many other forms. A corporation is a
legal entity separate from its owners, who own shares of stock in the company. Corporations can be
created for profit or nonprofit purposes and may be subject to increased licensing fees and government
regulation than other structures. Profits are taxed both at the corporate level and again when distributed
Shareholders are not personally liable for corporate obligations unless corporate formalities have not
been observed; such formalities provide evidence that the corporation is a separate legal entity from its
shareholders. Failure to do so may open the shareholders to liability of the corporation's debts.
Corporate formalities include:
- issuing stock certificates
- holding annual meetings
- recording the minutes of the meetings
- electing directors or ratifying the status of existing directors
Corporations should always be assisted by a qualified attorney.
Sub Chapter S Corporation (Inc. or Ltd.)
This structure is identical to the C Corporation in many ways, but offers
avoidance of double taxation. If a corporation qualifies for S status with the
IRS, it is taxed like a partnership; the corporation is not taxed, but the income
flows through to shareholders who report the income on their individual returns.
The following business structures are available in some states, but not all.
Limited Liability Partnership (LLP)
LLPs are organized to protect individual partners from personal liability for the
negligent acts of other partners or employees not under their direct control.
LLPs are not recognized by every state and those that do sometimes limit
LLPs to organizations that provide a professional service, such as medicine
or law, for which each partner is licensed. Partners report their share of profits
and losses on their personal tax returns. Check with your Secretary of State's
office to see if your state recognizes LLPs and if so, which occupations qualify.
Professional Service Corporation (PS)
A PS must be organized for the sole purpose of providing a professional service for which each
shareholder is licensed. The advantage here is limited personal liability for shareholders. This option is
available to certain professionals, such as doctors, lawyers, and accountants. Check with your Secretary
of State's office to find out which occupations qualify.
Limited Partnership (LP)
LPs have complex formation requirements, and require at least one general partner who is fully
responsible for partnership obligations and normal business operations. The LP also requires at least
one limited partner, often an investor, who is not involved in everyday operations and is shielded from
liability for partnership obligations beyond the amount of their investment. LPs do not pay tax, but must
file a return for informational purposes; partners report their share of profits and losses on their personal
These are formed for civic, educational, charitable, and religious purposes and enjoy tax-exempt status
and limited personal liability. Non-profit corporations are managed by a board of directors or trustees.
Assets must be transferred to another non-profit group if the corporation is dissolved.
Courtesy of the U.S. Small Business Administration.
Copyright © 2010 The Money Alert.com. All rights reserved.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to
participate in any particular trading strategy. The Money Alert does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any
information prepared by any unaffiliated third party, whether linked to this web site or incorporated herein, and takes no responsibility. All such information is provided solely for
convenience purposes only. The Money Alert is not affiliated with any of the firms or entities listed unless specifically stated. The Money Alert does not provide investment, tax or legal
advice. Please consult the appropriate professional regarding your personal situation.