Choosing the Right Form of Business

April 7, 2011

Choosing the appropriate legal form for a business is one of the first issues most entrepreneurs face. It is an important decision at the formation stage and also as a business grows. Consult a qualified attorney to help evaluate your choices.

Sole proprietorships usually are the easiest. Corporations offer some different advantages, but often with additional complexity. This article addresses some of the pros and cons of different types of legal structures for businesses. Even if your business has been in existence for a while, it may be time to review your options. There can be many complexities in determining the best legal structure.

Consider the following issues when evaluating the business structure decision:

  • Number of owners
  • Personal liability of owners
  • Tax treatment
  • Control and management
  • Capital contributions

Your business type also affects the type of checking account you will qualify for at the bank. A Home Federal Business Banker can help guide you through these options and get you on your way to launching your business.

Here is some of the other basic information to consider along with the advice of a qualified attorney:

Sole Proprietorship
Ownership rules - One owner.
Liability of owners - Unlimited liability for obligations of the business.
Tax treatment - Entity is not taxed, all income and losses passed through to owner.
Control and management - Sole proprietor manages the business.
Capital contributions - Sole proprietor makes capital contributions as needed. Easiest.
Ease of establishing - Easiest.

C Corporation (Regular corporation)
Ownership rules - Unlimited number of shareholders with no limit on the classes of stock.
Liability of owners - Generally, no personal liability for obligations of the corporation.
Tax treatment - Corporation is taxed at the corporation level. Shareholders are taxed on any dividends received.
Control and management - Board of Directors has overall management responsibility with officers having day-to-day responsibility.
Capital contributions - Shareholders usually by stock in corporation. Corporation can issue common and preferred stock.
Ease of establishing - Must file Articles of Incorporation with the Secretary of State.

S Corporation (Sub-chapter S corporation)
Ownership rules - Up to 75 shareholders are allowed. Only one class of stock is allowed.
Liability of owners - Generally, no personal liability for the obligations of the corporation.
Tax treatment - Entity is not taxed; profits and losses are passed through to the shareholders.
Control and management - Board of Directors has overall management responsibility with officers having day-to-day responsibility.
Capital contributions - Shareholders usually buy stock in the one class of stock issued by the corporation.
Ease of establishing - Must file Articles of Incorporation with the Secretary of State.

General partnership
Ownership rules - Unlimited number of general partners.
Liability of owners - All general partners are fully liable for the obligations of the business.
Tax treatment - Entity is not taxed, all income and losses passed through to the partners.
Control and management - General partners have equal management rights unless they decide otherwise.
Capital contributions - General partners contribute money or services to the business and receive interests in income and losses.
Ease of establishing - No filing; but a partnership agreement is needed.

Limited partnership
Ownership rules - Unlimited number of general and limited partners are allowed.
Liability of owners - Unlimited liability for general partners and no personal liability for the limited partners.
Tax treatment - Entity is not taxed, all income and losses passed through to general and limited partners.
Control and management - General partner manages the business subject to the Limited Partnership Agreement.
Capital contributions - Both general and limited partners contribute money or services and receive interests in profits and losses.
Ease of establishing - File an application with the Secretary of State.

Limited-liability company (LLC)
Ownership rules - Unlimited number of "members" are allowed.
Liability of owners - Generally, no personal liability for obligations of the entity.
Tax treatment - Entity is not taxed, all income and losses passed through to the members.
Control and management - The Operating Agreement describes how it is to be managed. A manager is usually designated to manage the business.
Capital contributions - The members typically contribute money or services to the LLC and receive an interest in the profits and losses.
Ease of establishing - File Articles of Organization with the Secretary of State.

Once you and your attorney have weighed your options, contact an experienced business banker to get started on your business banking needs.

*Postings in News and any other areas of and through our web site are for educational and information purposes only. They are not legal advice or legal opinions. You should seek professional advice from a qualified attorney authorized to practice law in your jurisdiction before acting on any information contained in this article.

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