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|