Starting a new business is a challenge, and without question a business entity formation provides the best protection for the owners against the liabilities often associated with a sole proprietorship or partnership. But what entity is best for me and my “partners”? That question cannot be answered on a generic basis. A consultation with a professional is essential, and an inexpensive measure compared to expenses that may occur down the road going “entity-less”.
The following chart provides the basics of the most popular business entities. Note that issues relating to a corporation or limited liability company are governed primarily by state law, whereas issues of federal taxation are governed primarily by the Internal Revenue Code. This is only a rough synopsis of differences among entities and should not be relied upon without a professional consultation.
| C Corporation | S Corporation | Multi-Member LLC | Single-Member LLC | |
| Number of Owners | At least one | Limited to 100; Owners may not be entities or non-U.S. citizens | At least two members | One member. |
| Class of Owners Hip Interest | Multiple classes of stock permitted as specified in Articles of Incorporation. | Only one class of stock permitted, but differences in voting rights permitted | Multiple classes of ownership permitted. | Multiple classes of ownership permitted. |
| Default Transferability of Ownership Interest | Freely transferable subject to shareholder agreements. | Freely transferable subject to shareholder agreements. | Cannot transfer without the unanimous consent of the non-transferring members. | Freely Transferable. |
| Scope of Owner Liability for Business Obligation | Limited to capital contribution or agreement to contribute. | Limited to capital contribution or agreement to contribute. | Limited to capital contribution or agreement to contribute. | Limited to capital contribution or agreement to contribute. |
| Asset Protection for Ownership Interest | None | None | Judgment creditor may be limited to charging order on economic interest. | None |
| Disproportionate Allocation of Profits and Losses Permitted | Yes, if it has multiple classes of stock. | No | Yes, unless elected S taxation election made | None |
| Liability for Entity’s Debts | Shareholders not personally liable for debts, unless corporate veil is pierced. | Shareholders not personally liable for s debts, unless corporate veil is pierced. | Members not personally liable for debts, unless corporate veil is pierced. | Members not personally liable for debts, unless corporate veil is pierced. |
| Participation in Management | Limited | Limited | Yes | Yes |
| Entity Manager/Director Permitted | No | No | Manager-Managed LLC controlled by Managers. | Manager-Managed LLC controlled by Managers. |
| Election Required for Flow Through Tax Treatment | Yes | IRS Form 2553 rx. 15th day of the 3rd month of the year of formation filing. | Yes if partnership (1065) is desired S or C Corporation treatment if qualified. | election not rx. if disregarded entity treatment desired. S or C treatment if qualified. |
| Federal Income Tax on the Entity’s Income | Corporate level and shareholder level when earnings as dividends | No tax at the corporate level. Income; shareholders pay on income whether or not distributed. | No income tax at the entity level. The partners will pay tax on their pro rata share of the profit. | No income tax at the entity level; Members pay tax on their pro rata share of the profit. |
| Permitted Owners | Anyone | Only U.S. Persons, certain Trusts and some LLC’s. | Any, unless election to be treated as S Corp. | Any, unless election to be treated as S Corp. |
| Public Disclosure | Officers & Directors | Officers & Directors | Managers and Authorized Representatives | Managers and Authorized Representatives |