Starting your Business - Which Legal Entity is Right for You?

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When starting a business, choosing the type of entity for that business is a crucial decision. That decision can affect the business owners taxes, liability for business obligations, and the management of the business.  Given the possible legal and tax consequences of this decision, it is one that should be made with the advice and counsel of a both a lawyer and a tax professional. Highlights of the features of several types of business entities are noted below.  

Sole Proprietorship 

  • Does not require the filing of any formation documents.

  • Pass-through taxation (i.e., no double taxation because a sole proprietorship is not taxed separately from its owner).  

  • A sole proprietor is personally liable for all of the debts and obligations of the business.  

  • Can only have one owner.

Partnerships 

  General Partnership

  • Does not require the filing of any formation documents.

  • Pass-through taxation.

  • Requires at least two, but can have an unlimited number of partners.

  • Partners are personally liable for all of the debts and obligations of the business. 

  • Flexible management structure.

  • Management issues and the rights and obligations of the partners are governed by a partnership agreement.

Limited Partnership (LP)

  • Formed by filing a certificate of limited partnership with the secretary of state in the state of formation.

  • Requires at least two partners (with at least one partner serving as the general partner), but can have an unlimited number of partners.

  • The rights and obligations of the partners are governed by a limited partnership agreement. 

  • Management of the partnership is generally vested in the general partner.

  • No personal liability for the limited partners.

  • The general partner is personally liable for the debts and obligations of the limited partnership.

  • Pass-through taxation.

Corporations

  C-Corporation

  • Formed by filing a certificate of incorporation with the secretary of state in the state of formation.

  • In addition to the certificate of incorporation, a c-corporation is governed by by-laws and a shareholders' agreement.

  • No personal liability for shareholders.

  • Taxed at both the corporation and shareholder levels.

  • Can have an unlimited number of shareholders.

  • Can have multiple classes of stock with different rights and preferences.

  • Governed by a board of directors that designates officers to manage the day-to-day operations of the business.

S-Corporation

  • Formed by filing a certificate of incorporation with the secretary of state in the state of formation.

  • Must timely elect s-corporation status.

  • In addition to the certificate of incorporation, an s-corporation is governed by by-laws and a shareholders' agreement.

  • No personal liability for shareholders.

  • Taxed like a partnership.

  • Can have no more than 100 shareholders.

  • Generally only United States citizens can be shareholders.

  • Can only have one class of stock.

  • Governed by a board of directors that manages the day-to-day operations of the business.

Limited Liability Company (LLC)

  • Formed by filing a certificate of formation with the secretary of state in the state of formation.

  • Can typically be a single member entity.

  • Permits an unlimited number of members.

  • No personal liability for members.

  • Pass-through taxation.

  • Flexible management structure.

  • Management of the business and the rights and obligations of the members are governed by an operating agreement.

 There is no one size fits all business entity.  The correct choice will vary depending on the specific needs and growth plans for each business and its owners.  Please contact us at (201) 345-5412 or info@morealaw.com if you have any questions about the formation or management of your own business.