Basic Structures

Brief descriptions of common business ownership structures.

Sole Proprietorship

The sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a
single person or a marital community. The owner operates the business, is personally liable for all
business debts, can freely transfer all or part of the business, and can report profit or loss on personal
income tax returns.

Limited Liability Company (LLC)

The LLC is generally considered advantageous for small businesses because it combines the limited
personal liability feature of a corporation with the tax advantages of a partnership and sole
proprietorship. Profits and losses can be passed through the company to its members or the LLC can
elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate
formalities. Owners are called members, and the LLC is managed by these members or by appointed
managers.

General Partnership

Partnerships are inexpensive to form; they require an agreement between two or more individuals or
entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the
partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but
must file an informational return; individual partners report their share of profits and losses on their
personal return. Short-term partnerships are also known as joint ventures.

C Corporation (Inc. or Ltd.)

This is a complex business structure with more startup costs than many other forms. A corporation is a
legal entity separate from its owners, who own shares of stock in the company. Corporations can be
created for profit or nonprofit purposes and may be subject to increased licensing fees and government
regulation than other structures. Profits are taxed both at the corporate level and again when distributed
to shareholders.

Shareholders are not personally liable for corporate obligations unless corporate formalities have not
been observed; such formalities provide evidence that the corporation is a separate legal entity from its
shareholders. Failure to do so may open the shareholders to liability of the corporation's debts.

Corporate formalities include:

issuing stock certificates
holding annual meetings
recording the minutes of the meetings
electing directors or ratifying the status of existing directors

Corporations should always be assisted by a qualified attorney.

Sub Chapter S Corporation (Inc. or Ltd.)

This structure is identical to the C Corporation in many ways, but offers
avoidance of double taxation. If a corporation qualifies for S status with the
IRS, it is taxed like a partnership; the corporation is not taxed, but the income
flows through to shareholders who report the income on their individual returns.

Special Structures

The following business structures are available in some states, but not all.

Limited Liability Partnership (LLP)

LLPs are organized to protect individual partners from personal liability for the
negligent acts of other partners or employees not under their direct control.
LLPs are not recognized by every state and those that do sometimes limit
LLPs to organizations that provide a professional service, such as medicine
or law, for which each partner is licensed. Partners report their share of profits
and losses on their personal tax returns. Check with your Secretary of State's
office to see if your state recognizes LLPs and if so, which occupations qualify.

Professional Service Corporation (PS)

A PS must be organized for the sole purpose of providing a professional service for which each
shareholder is licensed. The advantage here is limited personal liability for shareholders. This option is
available to certain professionals, such as doctors, lawyers, and accountants. Check with your Secretary
of State's office to find out which occupations qualify.

Limited Partnership (LP)

LPs have complex formation requirements, and require at least one general partner who is fully
responsible for partnership obligations and normal business operations. The LP also requires at least
one limited partner, often an investor, who is not involved in everyday operations and is shielded from
liability for partnership obligations beyond the amount of their investment. LPs do not pay tax, but must
file a return for informational purposes; partners report their share of profits and losses on their personal
returns.

Non-Profit Corporations
These are formed for civic, educational, charitable, and religious purposes and enjoy tax-exempt status
and limited personal liability. Non-profit corporations are managed by a board of directors or trustees.
Assets must be transferred to another non-profit group if the corporation is dissolved.


Courtesy of the U.S. Small Business Administration.

This article was submitted by Robert Valentine of Financial and Retirement Management.Robert Valentine is a well-known expert in the matters concerning investors. His articles on financial planning matters that concern investors have been published by several publications throughout the United States.