Perhaps you have an idea for a new business, or you’ve already started a new business, as a “sole proprietor” (individual owner). Should you start your business or keep it operating as a sole proprietorship, or would it be better overall for you to form a new separate legal business entity to operate your business? The main separate legal entities are the following: (1) “C” corporation, (2) “S” corporation, (3) limited liability company (“LLC”), (4) partnership (“GP”), and (5) limited partnership (“LP”). The reasons why you select one of these business entities over the others depends primarily upon your own business objectives as they relate to the tax, management, and limited liability aspects inherent to each particular type of legal entity.
Here are some of the general characteristics of these various legal entities:
(1) “C” Corporation
Limited liability protection for shareholders; two (2) levels of income tax (first, as taxable income of corporation itself, and second, upon dividends, if any, paid from the corporation to its shareholders).
(2) “S” Corporation
Limited liability protection for shareholders; may not have more than 35 shareholders; may have only certain types of shareholders; only its shareholders are subject to income tax (i.e., “pass-through” taxation).
(3) Limited liability company (“LLC”)
Limited liability protection for its members; only its members (like partners is a partnership) are subject to income tax (i.e., pass-through taxation); who may be a member is not as restrictive as for shareholders of an S corporation; generally not as many formalities for members as for shareholders in corporation, such as for meetings, voting, etc.
(4) Partnership (“GP”)
Sometimes called a general partnership; no limited liability protection for its partners; typically requires consent of all partners to make a business decision; only its partners are subject to income tax (i.e., pass-through taxation).
(5) Limited partnership (“LP”)
Limited liability protection only for limited partners; general partner(s) liable for all obligations of the partnership; only its partners (both general and limited) are subject to income tax (i.e., pass-through taxation).
We, together with your accountant or financial advisor, can assist you in selecting the type of business legal entity best suited to meet your needs, and we can prepare the required legal documents.