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© 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.


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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

Entity Type Creation Profit and Losses
Sole Proprietorship » no legal formalities necessary to create » owner entitled to use all losses and profits of business
General Partnership » 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
Limited Parenership » 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
Limited Liability Company » must be permitted by state law
» must file Articles of Organization
» by Operating Agreement
S- Corporation » 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
C-Corporation » must be permitted by state law
» must file Articles of Organization
» individual shareholders are not entitled to use corporate losses

Business Entity Issues Related to the Liability of a Business

Entity Type Liability Capital and Financing
Sole Proprietorship » sole proprietor has unlimited liability » all capital is that of sole proprietor
» all loans obtained on creditworthiness of owner
General Partnership » all partners have unlimited liability » contributions set by agreement (may be cash, property or services)
» personal loans, bank loans
Limited Parenership » all general partners have unlimited liability
» limited partners are liable up to the amount of their investment in the company
» set by agreement ( may be cash, property or services)
» personal loans, bank loans
Limited Liability Company » 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
S- Corporation » 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
C-Corporation » 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

Business Entity Issues Related to the Taxation of a Business

Entity Type Management and Control Taxation
Sole Proprietorship » management is vested in the proprietor » the business does not file a return nor does it pay taxes
General Partnership » each partner has a right of management which can be waived or limited by agreement of the partners » an informational tax return must be filed, but the entity itself does not pay taxes
Limited Parenership » management is centralized in the general partner
» limited partners may not participate in management and risk loss of liability protection if they do
» an informational tax return must be filed, but the entity itself does not pay taxes
Limited Liability Company » 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
S- Corporation » management is vested in the board of directors and in corporate officers
» an informational tax return must be filed, but the entity itself does not pay taxes
C-Corporation » 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

Business Entity Issues Related to the Duration of a Business

Entity Type Duration Transfer of Ownership
Sole Proprietorship » 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
General Partnership » 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
Limited Parenership » 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
» 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
Limited Liability Company » 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
S- Corporation » continuity of existence may be perpetual
» 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
C-Corporation » continuity of existence may be perpetual » ownership interests are freely transferable
» subject to restrictions in Art. of Inc. and Bylaws

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.



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