Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

1. When is this type of business generally recommended?

A sole owner desires:

- Simplicity of setting  up the business;

- Simplicity in operating the business; and

- Maximum control of the business. 

Two or more owners who are not worried or concerned about personal liability for business debts.

Two or more owners, with one or more owners who want:

- No tort liability

- Limited contractual liability:

- Passive investment; and/or

- Tax advantages such as pass through tax status.

Those who want:

-More formal business structure

-Limited liability for corporate debts,

-Corporate incentives, and,

-Under the right circumstances, tax savings despite the double taxation.

Those who want -More formal structure,

-Limited liability for corporate debts

-Corporate capital incentives

- No split taxation (a.k.a. double taxation) but, rather, pass- through taxation.

Fewer formalities than a corporation.  No split taxation (a.k.a. double taxation) but, rather, pass- through taxation (but, an LLC may elect to have split or double taxation of profits just like a C-corporation).

Limited liability for LLC debts.

LEGAL:

Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

2. What kind of business is allowed?

Any lawful business

Any lawful business

Any lawful business

Any lawful business, except banking, trust (or certain other businesses)

Any lawful business, except banking, trust or certain other businesses

Also if the business has excessive passive income (e.g., interest, rents, or royalties) this can risk the loss of S-tax status.

Any lawful business, except banking, trust (or certain other businesses)

3. Who is liable for business debts?

Sole proprietor

Each general Partner is jointly and severally liable.

Each general partner is jointly and severaly liable, but limited partner(s) is/are not liable.

Corporation;

not shareholders.

Corporation;

not shareholders.

LLC, not members.

4. Tort Liability

(e.g., fraud, defamation, negligence, personal injury, etc.)

Sole proprietor is personally liable for damages in tort claims (to the extent they are not covered or fully covered by insurance).

Each partner is personally liable for both his/her as well as other partners’ torts  committed within the scope of the partnership or authorized by such partner (and to the extent they are not covered or fully covered by insurance).

Limited partners are NOT normally personally liable.

But each general partner is personally liable for both his/her as well as other partners’ torts  committed within the scope of the partnership or authorized by such partner (and to the extent they are not covered or fully covered by insurance).

Corporate officers and directors are liable only for torts they personally commit, or potentially for negligent management or hiring of others (and in excess of insurance coverage)

LLC members are liable only for torts they personally commit, or negligent management or hiring of others (in excess of insurance coverage)

5. Who may legally bind the business in contracts, etc.?

Sole proprietor

Any general Partner

Any general partner

Board of Directors and officers

Board of Directors and officers

Members (or, alternatively, managers if LLC so chooses a manager managed type of operation)

6. What happens if an owner dies or leaves the business?

Dissolves automatically

Dissolves automatically (unless partnership agreement states differently)

Dissolves automatically (unless partnership agreement states differently)

No effect.

No effect.

Dissolves automatically

(unless LLC agreement states differently)

7. Can I sell or transfer my ownership interest?

Yes.

Yes, but the partnership agreement will usually require consent of all other partners or a % of partners.

Securities laws regulate.

Securities laws regulate.  More restrictive than C-corporation.

Subject to LLC agreement.

STRUCTURE:

Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

8. Who owns the business?

Sole proprietor

General Partner(s)

General partner(s) and limited partner(s)

Shareholders

Shareholders

(Strict limits of types of shareholders, (e.g., only individual persons, estates, certain specified trusts, and no nonresident alien persons or entities).

Members

9. How many people can own the business?

One.

Two or more.

Two or more

One or more.

1 to 75.

One or more.

10. Who manages the business?

Sole proprietor

General Partner(s)

General partner(s)

Board of Directors

Board of Directors

Members (or managers if LLC so chooses)

STARTING BUSINESS

Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

11. What paperwork is necessary to set up the business?

Little.

(For example, business License and, sometimes, a fictitious business statement).

Little.  However, strongly advise creating a partnership agreement!

Start up filing is necessary. 

Strongly advise partnership agreement!

File with Secretary of State.  Then, bylaws and meeting of board of directors.  Other requirements.

File with Secretary of State.  Other requirements. Strongly advise creation of an operating agreement.

12. Capitalizing business (Start up funds)

Sole proprietor contributions

General  Partner(s)

Contributions

General partner(s) and limited partner(s)

Contributions

Initial Shareholders contributions of money, labor or services done, debts cancelled, property received (Corp. Code § 409)

Members contributions.

CHANGING BUSINESS

Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

13. Notable problems or complications if change to a different type of business

If change to an LLC, may involve tax consequences.

If terminate S status to become C corporation, you can’t be an S Corporation for another 5 years.

TAXING BUSINESS

Sole Proprietorship

General Partnership

Limited Partnership

C-Corporation

S-Corporation

LLC

14. How are profits taxed?

Profits are included in the sole proprietors individual income at his individual tax rates

Each partner’s share of profits are included in his or her individual income at his or her individual tax rates (unless partnership elects corporate tax treatment).

Each partner’s share of profits are included in his or her individual income at his or her individual tax rates (unless partnership elects corporate tax treatment).

Profits are split.  Corporate profits are taxed a corporate rate, and, then, dividends paid from corporate profits are taxed at individual rates.  However, careful planning can often avoid this double tax.

Corporate profits pass through to proportionately to the individual shareholders and are taxed at each individual shareholder’s tax rate.

LLC profits pass through to proportionately to the individual mebersand are taxed at each individual shareholder’s tax rate.

15. Can business losses be deducted?

Generally, yes.  Losses deducted from active business income on individual tax return.

Generally, yes.

Active partners may deduct income from active business income on individual tax return.

General Partners may deduct income from active business income on individual tax return.

Limited partners may not deduct income from active business income but may use them to offset other investment income.  See tax professional.

Corporation deducts business losses.  Shareholders do not deduct business losses.

Corporate losses pass through to proportionately to the individual shareholders and are deducted on each individual tax return.

Generally, may deduct income from active business income on individual tax return, but subject to special rules.  Get advice from tax professional.

16. Do owners who work at business receive tax-deductible employee benefits?

Generally not.

However, sole proprietor may deduct medical insurance premiums and establish IRA or Keough retirement plan.

Generally not.

However, partner may deduct medical insurance premiums and establish IRA or Keough retirement plan (Or, alternative, partnership may elect corporate tax treatment).

Generally not.

However, partner may deduct medical insurance premiums and establish IRA or Keough retirement plan (Or, alternative, partnership may elect corporate tax treatment).

Law permits tax deductible fringe benefits (for example: corporate retirement plans, profit sharing plans, tax-favored stock option, tax-favored bonus plans for employee shareholders, may reimburse actual medical expenses of employees; also can deduct group term life insurance within certain limits.

Generally not.

However, sole proprietor may deduct medical insurance premiums and establish IRA or Keough retirement plan.

Generally not.

However, member may deduct medical insurance premiums and establish IRA or Keough retirement plan (Or, alternative, partnership may elect corporate tax treatment).

17.How does the  government assesses tax status?

Automatically.

Automatically, except can elect corporate status by filing proper IRS form.

By filing certificate of limited partnership with the proper state office (Also, can elect corporate status by filing proper IRS form).

By filing Articles of Incorporation with the Secretary of State.

By filing tax election IRS form and meeting certain requirements.

1 owner LLC treated as sole proprietor.  2 or more owners treated as a partnership.  Alternatively, can elect corporate tax status.

18. How are owners taxed when business is sold?

Personal tax level level.

Each partner’s indivdual tax level.

Each partner’s indivdual tax level.

Both corporation and shareholders are taxed upon liquidation.

Usually each shareholder’s personal tax, but sometimes taxed like a C-corporation if formerly existed as a C-corporation.

Each member’s indivdual tax level.