SELECTING A BUSINESS ENTITY

One of the first steps when starting a business is selecting a business entity. Generally the main issues are business control, liability and taxes. The following is a summary of the business entity types. I always recommend consulting with an attorney about liability issues or CPA about tax issues if you have any questions related to the business entity selection. It is much easier and cheaper to select the correct business entity than to undo a mistake.

Sole Proprietorship

Control

Owner has complete control over the business entity and is responsible for all decisions related to the business.

Liability

Owner is solely liable. His or her personal assets and any business assets are open to attachment in any legal case.

Tax

Owner reports all business incomes and expenses on personal income tax return.

Continuity

Business terminates upon the owner's death or withdrawal. Owner can sell the business but will no longer remain the sole proprietor.

General Partnership

Control

Each partner has the authority to enter into contracts and make business decisions in accordance with the partnership agreement.

Liability

Each partner is personally liable for all business debts.

Tax

Each partner reports partnership income on their individual income tax returns. The partnership business entity does not pay any taxes but is required to file an informational tax return.

Continuity

Unless the partnership agreement stipulates otherwise, a partnership business entity dissolves upon the death or withdrawal of a partner.

Limited Partnership

Control

General partners control the business and are responsible for all business decisions.

Liability

General partners are personally responsible for partnership liabilities. Limited partners are only liable for the amount of their investment.

Tax

The partnership business entity is required to file an informational tax return, but does not pay income taxes. Each limited and general partner reports their share of partnership income or loss on their individual income tax returns.

Continuity

Death of a limited partner does not dissolve business, but death of the general partner might. The partnership agreement generally contains provisions about the dissolution of the limited partnership.

Limited Liability Company

Control

The owner or partners have control and authority over all the business decisions.

Liability

Partners are not liable for business debts.

Tax

The owner or partners report LLC income on their individual tax returns. The Limited liability company business entity is required to file an informational tax return, but does not pay income taxes.

Continuity

Different states have different laws regarding the continuity of LLC's.

Corporations

Control

Shareholders appoint the board of directors, who in turn appoints officers. The officers hold the highest authority. Officers and the board of directors are responsible for the decisions of the corporation.

Liability

Offers liability protection. A corporation's debt is not considered that of its owners. Owners can be liable for the business debt when they do not follow the laws about making and approving business decisions. This is know as piercing the corporate veil.

Tax

The corporation files and pays income taxes. Shareholders only pay taxes on the dividends they received from the corporation.

Continuity

The corporation is its own legal entity and can survive the deaths of owners, partners and shareholders.

S Corporations

Control

Shareholders appoint the board of directors, who in turn appoints officers. The officers hold the highest authority. Officers and the board of directors are responsible for the decisions of the corporation.

Liability

Offers liability protection. A corporation's debt is not considered that of its owners. Owners can be liable for the business debt when they do not follow the laws about making and approving business decisions. This is know as piercing the corporate veil.

Tax

Shareholders report their share of corporate profit or loss on their individual income tax returns. The S Corporation business entity is required to file an informational tax return, but does not pay income taxes.

Continuity

The corporation is its own legal entity and can survive the deaths of owners, partners and shareholders.