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One of the most important decisions in starting a small business is determining how you should organize your business.
The six most common business structures in the United States are:
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Compare legal entities
Sole proprietorship
A sole proprietorship is the quickest and easiest way to set up a business operation since it is unincorporated and has only one owner. The owner of the business is solely liable for its obligations. He or she simply utilizes his or her personally owned assets for business purposes.
General partnership
A general partnership is formed by two or more people engaging in business to make a profit. The partners jointly own the assets, profits, and losses.
General partnerships do not require any registration with any state or local government, except with regard to business tax registration and recording obligations.
The partnership agreement or organization documents can define the duties and obligations of each partner, but these delegations have no effect on each partner’s liability.
Limited partnership
A limited partnership typically has the same characteristics of a general partnership, except that the limited partners have limited liability protection.
In addition, limited partnerships must file organizational documents with the governmental authorities.
S corporation
An S corporation is formed by filing a charter with the Tennessee secretary of state.
The biggest attraction of this structure is its tax advantages. Generally, an S corporation is taxed like a partnership. Therefore, the profits and losses flow through to the shareholders.
The shareholders, board of directors, and officers of an S corporation must have regular meetings and maintain company minutes. They must elect for the corporation to be taxed as an S corporation.
S corporations have certain limitations:
- Maximum of 100 shareholders
- Only individuals, certain types of trusts and estates, and certain tax exempt organizations can be shareholders (i.e., no for-profit entity can be a shareholder)
- No subsidiaries except for a subsidiary that is owned 100% by the parent S corporation
- Must have only one class of stock (but can have non-voting and voting stock)
C corporation
Like S corporations, C corporations are formed by filing a charter with the Tennessee secretary of state. The difference is that a C corporation is subject to Federal Corporate Income taxes while an S corporation is not.
In a C corporation:
- The shareholders, board of directors, and officers must execute certain organizational minutes
- All income and losses typically remain at the corporate level (i.e. no benefit of flow-through)
- Shareholders must pay dividend taxes on any distribution of earnings they receive from the company
LLC
An LLC is basically a hybrid between a partnership and a corporation. In an LLC, the shareholders of the company have a limited liability to the company's actions along with flow-through tax benefits of a general partnership.
An LLC allows members the option of participating directly in the management of the business or designating certain members or nonmembers as managers.
Compare Legal Entities
The chart below demonstrates the advantages and disadvantages of each type of business structure.
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Sole Proprietorship |
Partnership |
S Corp. |
Corp. |
LLC |
| Difficulty and cost to form |
Low |
Low to Moderate |
High |
High |
Moderate |
| Difficulty and cost to maintain |
Low |
Low |
High |
High |
Low to Moderate |
| Risk of owner liability |
High |
Low |
Low |
Low |
Low |
| Difficulty of tax preparation |
Low |
Moderate |
Moderate | High |
Moderate |
| Flexibility of ownership |
Low |
Moderate |
Low |
High |
High |
| Cost of terminating business |
Low |
High |
High |
High |
Moderate |
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