A Sole Proprietorship is the simplest business structure and is basically a business that is owned by an individual. Because of this, they are the easiest business to start-up. However, organizing a business as a Sole Proprietorship leaves the owner personally liable for all of the legal and financial liabilities of the business. Unlike a corporation with it’s built in asset and liability-limiting protections, when a sole proprietorship is sued, the owner’s personal assets are put at risk of seizure. Moreover, all business income is taxed as the owner’s personal income, and there are fewer tax benefits or shelters than those afforded by an incorporated businesses.
A partnership exists when there is more than one owner of a business, and that business is not incorporated or organized as a limited liability company. The partners share in the profits, losses, and liabilities of their enterprise, with the percentages dictated by written agreement. The partners could be individuals, corporations, trusts, other partnerships, or any combination of these examples. One of the biggest disadvantages is that the owners have unlimited liability for all legal debts and obligations of the company. Additionally, each of the partners acts as a representative, and as such, can commit the company to obligations without approval of the other partners. Liability caused by one partner leaves all partners vulnerable to lawsuits. Further, the tax advantages aren’t as significant as they are with a corporation. Business income and losses are reported on the individual tax returns of the owners.
Limited Liability Company
A limited liability company, or “LLC” is a business organization structure that allows for certain favorable tax treatments, as well as personal liability protection, for the “members” involved. It is important to note that the specific structure and status can vary from state to state so complete consideration of the state’s laws in which the LLC will be formed is crucial. An LLC as a business structure model allows for multiple owners, or “Members,” and a “Managing Member,” to enjoy limited liability. The Managing Member is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the member’s personal income tax returns.
A traditional Corporation (or a “C” Corporation) is a business structure that is created as a separate, distinct legal entity from its owners (or “shareholders”). Once a corporation is formed, the corporation can have it’s own bank accounts, own property, conduct business, and even establish a line of credit, irrespective of the individual accounts or credit of the shareholders. The primary advantage to having a business formed as a corporation is the fact that the shareholders are not personally liable for the debts and legal liabilities incurred by the corporation. For example, if a corporation is sued for business reasons and loses, the shareholders will not be required to satisfy the debts of the corporation from their own personal assets. This safeguards assets and properties of the individual shareholders, and as such, is more attractive to potential investors.
An S Corporation (named in such a manner because of it’s organization meeting the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code) is a corporation that is structured in such a manner as to provide a pass-through entity for tax purposes, much like a partnership whose income or losses “pass through” to the individual shareholders’ personal tax returns (in direct proportion to their investment or ownership in the company), while still providing the same protections for assets and from liabilities as a traditional corporation. The shareholders will pay personal income taxes based on the S corporation’s income, regardless of whether or not the income is actually distributed, but they will avoid the “double taxation” that is inherent to the traditional corporation (or “C” corporation).
The special statutory close corporation statutes require that there be a limited number of shareholders (under 30 or, in some states, under 50), and that certain transfer restrictions appear on the stock certificates. The statutory close corporation must be formed under the special statute with particular language used in the articles of organization.
A failure to follow the required formalities can form the basis for a court piercing the veil of limited liability, and imposing unlimited, personal liability on the shareholders of a regular corporation. With the reduction or absence of such formalities, the likelihood of this doctrine being applied is reduced significantly. The statutory close corporation shares this advantage with the LLC.
Groups of certain professionals can form corporations known as professional corporations or professional service corporations (“PC”). The list of professionals covered by professional corporation status differs from state to state; though it typically covers accountants, engineers, physicians and other health care professionals, lawyers, psychologists, social workers, and veterinarians. Typically, these professionals must be organized for the sole purpose of providing a professional service (for example, a law corporation must be made up of licensed attorneys); professional corporations enjoy most of the limited-liability benefits as do the more traditional corporations.
Nonprofit Corporations are formed in order to conduct activities and transactions for purposes other than shareholder financial gain, while at the same time providing the same asset protections and limited liabilities of a standard corporation. A nonprofit corporation can make a profit, but this profit must be used strictly to forward the goals rather than to provide earned income (in the form of dividends) to its shareholders. It is understood that most of the transactions and activities of a Nonprofit Corporation will not be commercial in nature.
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