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Business Structures Overview

Sole Proprietorships

Main Advantages
o Easy to create and maintain.
o Business and owner are legally the same entity
o No fees associated with the creation of the business entity
o Owner may deduct a net business loss from personal income taxes
Main Disadvantages
o Owner is personally liable for any debts, judgments or other liabilities of the
business
o Owner must pay personal income taxes for all net business profits

General Partnerships

Main Advantages
o Easy to create and maintain
o No fees associated with creation of the business entity
o Owners may report their share of net business losses on personal income
taxes
Main Disadvantages
o All owners are jointly and personally liable for any debts, judgments or other
liabilities of the business
o Owners must pay personal income taxes for all net business profits

Limited Partnerships

Main Advantages
o Easy to attract investors as they are only liable for their total amount of their
investment into the business
o The limited partners enjoy limited liability for any debts, judgments or other
liabilities of the business
o The general partners are more free to focus their attention on the business
o General partners are able to raise cash without diminishing their control of
the business
o Limited partners can leave the business without dissolving the limited
partnership
Main Disadvantages
o General partners are jointly and personally liable for any debts, judgments or
other liabilities of the business
o Can be more expensive to create than a general partnership
o Mainly suited to businesses such as real estate investment groups or in the
film industry

Regular Corporation

Main Advantages

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Owners of the business enjoy limited liability for the business' debts,
judgments and other liabilities
Some benefits may be deducted as business expenses
With good accounting, owners and business may be able to pay lower taxes
by splitting the business profits among owners
Main Disadvantages
More expensive to establish than a sole proprietorship or partnership
Complicated paperwork that must be filed with the secretary of state
Corporation must pay its own taxes as a separate tax entity

S Corporation

Main Advantages
o Owners of the business enjoy limited liability for the business' debts,
judgments and other liabilities
o Owners share the net profits of the business and report their share on
personal income taxes
o Owners share the net business loss and can offset other income by reporting
this loss on personal income taxes
Main Disadvantages
o More expensive to establish than a sole proprietorship or partnership
o Paperwork is more complicated than the paperwork required for a LLC, but
similar advantages
o The ownership interest of the various owners determines their respective
incomes from the profits of the business
o Some benefits are only given to owners that have more than 2% of the
business' shares

Professional Corporation

Main Advantages
o Owners are not personally liable for the malpractice of other owners
Main Disadvantages
o More expensive to establish than a sole proprietorship or partnership
o The paperwork and filings may be onerous to owners
o Every owner must be in the same profession as all other owners

Nonprofit Corporation

Main Advantages
o Corporation does not pay income taxes on money it receives for a charitable
purpose
o Donors that give for a charitable purpose may deduct their donations from
income taxes
o Some benefits may be deducted as business expenses
Main Disadvantages
o The full tax benefits and advantages can only be utilized by businesses that
have been incorporated for a charitable, educational, scientific, religious or
literary purpose.

If property is transferred to the nonprofit corporation, the property must stay


with the corporation. Even if the corporation ends, the property must go to
another nonprofit

Limited Liability Company (LLC)

Main Advantages
o Owners of the business enjoy limited liability for the business' debts,
judgments and other liabilities, even if the owners engage in significant
control of the business
o The business profits and losses can be allocated to the owners along different
lines than ownership interest (for example, a 10% owner may be allocated
30% of the business' profits)
o Owners can choose how the LLC will be taxed, either as a partnership or a
corporation
Main Disadvantages
o More expensive to establish than a sole proprietorship or partnership

Professional Limited Liability Company

Main Advantages
o Allows state licensed professionals to enjoy the same advantages as a LLC
Main Disadvantages
o Same disadvantages as a LLC
o All members must belong to the same profession

Limited Liability Partnership

Main Advantages
o Business entities associated with things like law, medicine and accounting
normally use this
o Partners are not liable for the malpractice of other partners
o Partners take their share of loss or gain on their personal income taxes
Main Disadvantages
o Partners remain personally liable for obligations to business creditors,
landlords and lenders
o Not every state allows limited liability partnerships
o Often limited to only a select few professions

Business Structures Tax Overview


Sole Proprietorship
Entity: Not an entity separate from the owner, so no separate tax return.
Filing: Owner includes the operations of the sole proprietor-ship on his/her individual tax
return.
Federal Employer Tax Number: If a sole proprietor has employees, then a tax number is
required.
Multiple Owners: No. If the business has multiple owners it is no longer a sole proprietorship.
Taxable Year: Generally, the same as the owner's, which is usually a calendar year.
Partnership
Entity: Not separate taxable entity, but must file an information tax return.
Filing: Partners include their share of the income, gain, loss, deductions, and credits of the
partnership on their personal tax return.
Federal Employer Tax Number: Required.
Multiple Owners: Requires two or more people who carry on a business for profit.
Taxable Year: If all partners do not have the same taxable year, the partnership will have
to adopt the taxable year of majority interest or a calendar year if there is no majority
interest.
S Corporation
Entity: Treated as a partnership for tax purposes but may not have more than 75
shareholders
Filing: Shareholders include their share of the income, gain, loss, deductions, and credits
of the corporation on their personal tax return.
Federal Employer Tax Number: Required.
Multiple Owners: Usually more than one shareholder. No more than 75 shareholders, who
must be individuals, or the IRS will not treat corporation as a partnership for tax purposes.
Taxable Year: Can usually choose its taxable year.
C Corporation
Entity: A taxable entity separate from its shareholders that may have an unlimited number
of shareholders
Filing: Corporation must file and pay taxes at the corporate level; the shareholders must
pay taxes on the distributions they receive.
Federal Employer Tax Number: Required.
Multiple Owners: Usually more than one shareholder.
Taxable Year: Can usually choose its taxable year.
Limited Liability Company
Entity: Not always a separate taxable entity, but must file an information tax return.
Filing: Depending on its election, may choose to be taxed as a partnership or a

corporation.
Federal Employer Tax Number: Required.
Multiple Owners: No. Every state except Massachusetts allows single member LLC.
Taxable Year: If members do not all have the same taxable year, the LLC must adopt the
taxable year of majority interest or a calendar year if there is no majority interest.

Business Structure Tax Filings


Sole Proprietorship. There are no states that require a sole proprietorship to file
organizing documents with the state. However, before you are up and running, you should
make sure that you have any necessary licenses or permits and that you are entitled to
use the name that you choose for the business.
General Partnership. There are no states that require a general partnership to file
organizing documents with the state. However, before you are up and running, you should
make sure that you have any necessary licenses or permits and that you are entitled to
use the name that you choose for the partnership. It is also wise to draft a partnership
agreement outlining the rights and responsibilities of the various partners.
Limited Partnership. It is important to have a limited partnership agreement setting out
the partners' rights and responsibilities. Each state also requires a limited partnership to
file a Certificate of Limited Partnership, usually with the Secretary of State. Generally,
states require the certificate to include the name of the limited partnership (including
initials or some other designation that makes the public aware that the business is a
limited partnership). The name and address of each general partner, a mailing address for
the limited partnership, and the latest date the limited partnership will dissolve.
Remember, if you fail to strictly adhere to the state's requirements for forming a limited
partnership, your limited partners may be exposed to personal liability for the limited
partnership's debts and obligations. Finally, if you are going to do business in other states,
it is important to meet their requirements as well.
Corporation. A corporation must be set up according to the laws of the state of
incorporation. Articles of Incorporation containing the corporate name, the purpose of the
corporation, the number of shares the corporation is authorized to issue (and the classes
of stock if a "C" corporation), the address of the registered office, the name of the
registered agent, and the names and addresses of each person forming the corporation
("the incorporators"). Before the corporation actually comes into existence, the
incorporators will need to draft by-laws and hold an initial meeting of the incorporators
and directors (Board of Director's meeting) where officers will be elected.
Limited Liability Company. A limited liability company must file Articles of Organization
with the state. Most states require this document to include the name of the limited
liability company (including initials or some other notation that the company is a limited
liability company), the period of duration (some states permit perpetual duration), the
name and address of the registered agent, and the address of the principal office. Usually,
a limited liability company has an operating agreement, similar to a general partnership,

but this does not need to be filed with the state. Although most states allow one member
limited liability companies, a few still require at least two members.