Monday, February 9, 2015

What is the Best Business Entity For My New Business?

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