© Created by Kimberly Allegretti who is an Attorney and Special Counsel at Wood, Ris & Hayes, P.C., in Denver, Colorado. Article or any portions of it MAY NOT BE REPRODUCED without prior written consent - all rights reserved.
Get Competive Quotes to :
Incorporate a Business -OR- to Form an LLC
Browse below to compare the advantages and disadvantages of incorporating your business (including c-corp, s-corp), forming a limited liability company - LLC, partnership and sole proprietorship and see which one suits the best for your needs.
Business Entity Issues Related to the Creation of a Business
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Entity Type
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Creation
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Profit and Losses
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Sole Proprietorship
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» no legal formalities necessary to create |
» owner entitled to use all losses and profits of business |
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General Partnership
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» by agreement of 2 or more persons
» informal agreement (determined by actions of the partners)
OR
» formal written agreement |
» by agreement
» in absence of agreement:
- profits shared equally
- if agreement covers profits but not losses then losses shared in same ration
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Limited Parenership
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» must be permitted by state law
» must file a certificate of limited partnership
» by agreement of 2 or more persons (at least 1 gen'l partner and 1 limited partner |
» general partners share by agreement
» limited partners:
- share profits by agreement
- share losses only up to their capital contribution |
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Limited Liability Company
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» must be permitted by state law
» must file Articles of Organization |
» by Operating Agreement |
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S- Corporation
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» must be permitted by state law
» must file Articles of Incorporation
» must file form 2553 with IRS |
» individual shareholders entitled to use proportionate share of S-Corp's losses limited to the extent of the shareholder's basis in the corporation |
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C-Corporation
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» must be permitted by state law
» must file Articles of Organization |
» individual shareholders are not entitled to use corporate losses |
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Business Entity Issues Related to the Liability of a Business
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Entity Type
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Liability
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Capital and Financing
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Sole Proprietorship
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» sole proprietor has unlimited liability |
» all capital is that of sole proprietor
» all loans obtained on creditworthiness of owner |
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General Partnership
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» all partners have unlimited liability
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» contributions set by agreement (may be cash, property or services)
» personal loans, bank loans
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Limited Parenership
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» all general partners have unlimited liability
» limited partners are liable up to the amount of their investment in the company
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» set by agreement ( may be cash, property or services)
» personal loans, bank loans
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Limited Liability Company
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» all members are liable up to the amount of their investment in the company
» members and managers have no personal liablity for the debts or obligations of the LLC |
» set by agreement ( may be cash, property or services)
» personal loans, bank loans |
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S- Corporation
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» shareholders liable up to the amount of their investment in the company
» shareholders have no personal liablity for the debts of the corporation
» must file form 2553 with IRS |
» issuance of stocks
» personal loans, bank loans |
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C-Corporation
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» shareholders liable up to the amount of their investment in the company
» shareholders have no personal liablity for the debts of the corporation |
» issuance of equity securities (stock)
» issuance of debt securities (bonds)
» personal loans, bank loans |
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Business Entity Issues Related to the Taxation of a Business
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Entity Type
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Management and Control
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Taxation
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Sole Proprietorship
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» management is vested in the proprietor |
» the business does not file a return nor does it pay taxes |
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General Partnership
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» each partner has a right of management which can be waived or limited by agreement of the partners
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» an informational tax return must be filed, but the entity itself does not pay taxes |
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Limited Parenership
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» management is centralized in the general partner
» limited partners may not participate in management and risk loss of liability protection if they do
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» an informational tax return must be filed, but the entity itself does not pay taxes
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Limited Liability Company
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» management may be vested in the members or the managers |
» an informational tax return must be filed, but the entity itself does not pay taxes |
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S- Corporation
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» management is vested in the board of directors and in corporate officers
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» an informational tax return must be filed, but the entity itself does not pay taxes |
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C-Corporation
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» management is vested in the board of directors and in corporate officers |
» the corporation must file a return and must pay taxes on corporate income
» the individual shareholders also pay taxes on dividends |
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Business Entity Issues Related to the Duration of a Business
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Entity Type
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Duration
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Transfer of Ownership
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Sole Proprietorship
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» no continuity of life upon death or retirement of owner |
» assets may be sold in entirely or in part, but either results in new entity |
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General Partnership
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» by agreement
» can be dissolved by:
- action of a partner (eg. withdrawal)
- operation of law (eg. death or bankruptcy)
- court decree |
» partnership interest (with full rights) may only be transfered upon consent of all partners |
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Limited Parenership
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» general partners:
- by agreement
- by withdrawal, death or insanity of gen'l partner
» limited partner's death or withdrawal does not end the partnership unless he or she is the only limited partner
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» partnership interest of general partner (with full rights) may only be transfered upon consent of partners
» partnership interest of limited partner can be freely transferable but usually it is restricted
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Limited Liability Company
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» by Articles of Oragnization
- set date
- set dissolution events
» in some states, duration may now be perpetual |
» members must consent to transfer of ownership interests
» subject to restriction in Articles of Organization and Operating Agreement |
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S- Corporation
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» continuity of existence may be perpetual
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» ownership interests are freely transferable but must keep in mind IRS req's for retaining S-Corp. status
» subject to restrictions in Art. of Inc. and Bylaws |
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C-Corporation
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» continuity of existence may be perpetual
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» ownership interests are freely transferable
» subject to restrictions in Art. of Inc. and Bylaws |
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Kimberly Allegretti is an attorney and a special counsel at Wood, Ris & Hayes, P.C., in Denver Colorado and has helped incorporate several small business startups in the greater Denver area.
Get Competive Quotes to : Incorporate Your Small Business -OR- to Form an LLC
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