This post is intended solely as an information source and its contents should not be construed as legal advice. Readers should not act upon the information presented without professional counsel.
There is some confusing information in this thread. Here is the skinny.
Here is a generic description of the differences:
Sole Proprietorship This is the simplest and least regulated type of organization with minimal legal start-up cost and limited the continued maintenance and paperwork. The sole proprietorship has only one owner who has total control, receives all the profits, and business income is taxed as personal income. This sole owner will be responsible for procuring all financing. However, all this simplicity comes with a high risk of personal liability. In other words, in the event the business has difficulty paying its creditors, the creditors may take the personal assets of the business owner. Additionally, the sole proprietorship ends when the owner dies.
Partnership A partnership is relatively easy to form and can provide some advantages over a sole proprietorship by allowing for more than one owner, adding additional sources of financing and other "Partners" to absorb any loses the business may incur. Profits are still taxed as personal income and in a traditional partnership, the general partners are still personally liable for the debts and liabilities of the partnership. However, Limited Partnerships ("LP") and Limited Liability Partnerships ("LLP") offer the tax advantages of a partnership with a more limited exposure to liability but with limited control.
Corporation The most complex of the business organizations is the corporation. A corporation is a legal entity which exist separately from its owners. It can have several hundred owners or just one owner who owns one hundred percent of the stock. The owners of a corporation, also know as "stockholders" are not personally liable for the debts and liabilities of the corporation like the owners of a sole proprietorship or partnership. While this configuration does shield its owners from personal liability it results in "double taxation" on earnings (earning are taxed as corporate earnings and personal earnings). A certain type of Corporation, known as a "S corporation" allows for the owners to overcome the double taxation problem, however these corporation must meet certain criteria. To form a corporation Articles of Incorporation must be filed with the Secretary of State, and By-Laws and Stockholders' Agreements should be drafted. Additionally, certain formalities as annual stockholders' meetings and meetings of the board of directors must be maintained.
Limited Liability Company The Limited Liability Company ("LLC") is a relatively new entity that is comprised of "Members" which are similar to the stockholders in a corporation. However for income tax purposes LLC are treated as partnerships, resulting in no double taxation. There are some exceptionsâ€Â¦.the âہ“check the boxâ€Â� rules allow for an LLC to be taxed as an S-Corp or C-Corp by making the proper election. A single member LLC is considered a âہ“disregardedâ€Â� entity for tax purposes by the IRS. LLC's also offer liability protection to its members. To create an LLC, Articles of Organization are filed with the Secretary of State. The members also execute an Operating Agreement which defines the relationship of between the Company and its members.
Taxes: Even thought S-Corp. tax and partnership tax are both pass through taxation there are some differences. Which is better for you depends on many factors. Discuss the tax election with a qualified accountant.
Personal Liability protection
Sole proprietorship = none.
Corporations (S and C corps): Assuming the corporation has been set up and ran properly, thereby preventing a âہ“piercing of the corporate veilâ€Â� situation the liability of the corporation stops at the entity level and the individual stockholder(s) do not have any personal liability. There are exceptions such as where a stockholder personally guaranteeâ€â„¢s the debt, whereby the stockholder is then personally liable of the corporations debt in accordance to the guaranty documentation.
LLC: In the world of law, LLCâ€â„¢s are infants. There is very little case law involving the personal liability of Members (like stockholders of corps) of an LLC. The cases that are out there that deal with this seem to indicate that an LLC will be treated like a corporation in that the normal piercing the corporate veil type of analysis will be applied to see if personal liability is attached. This is a logical conclusion because most state LLC statutes are very similar to the statutes giving rise to corporations. If anyone tells you that an LLC is less protective than a corporation they are just flat wrong (as of November 2004) and the opposite is true alsoâ€Â¦there is nothing that guaranties that a LLC is as protective as a corporation.
Which Entity?: This is a complicated answer ant can only be made on a case by case basis and usually revolves around tax treatments and/or employment taxes. Discuss this in detail with a qualified attorney. There are some special circumstances where one entity is better than another. For example. If the business was going to own real estate it is usually better to own the real estate in a separate entity from the operating business and to choose an LLC for this. The LLC offers some significant tax advantages over a corporation for owning real estate. Other considerationsâ€Â¦usually corporations require more maintenance from a paperwork stand point than a LLC. In some states the cost of forming the entities are drastically different also.
This post is limited by space and can not discuss all the intricate advantages and disadvantages of each entity; however, the importance of determining the correct entity for your business can not be stressed enough. Therefore, you should sit down and discuss your needs and how they apply to each type of entity with your Attorney and/or Accountant.
