Many small businesspeople would like to know what form of entity best serves their business needs. The following summary is intended to provide a quick overview. For further questions, please contact Northwest Business Law Group for an appointment at (503) 224-9946.
The sole proprietorship is the default form of business entity owned by a single individual. There are no formal requirements for establishing a sole proprietorship, and the owner has unlimited management and operational control over the business. The owner of a sole proprietorship has unlimited personal liability for the obligations of the business and all profits and losses pass through to the owner for tax purposes.
The general partnership is the default form of business entity owned by more than one person. Each partner has equal management rights in the business, and each partner is personally liable for the partnership’s obligations. Profits and losses pass through to the individual partners for tax purposes.
Limited Liability Partnership
The limited liability partnership (LLP) is only available to partnerships engaged in a certain listed professions. Although partners in an LLP share equal management rights and are taxed individually, the significant difference between an LLP and a general partnership is that individual partners are not liable for the partnership’s obligations.
The limited partnership consists of at least one limited partner and one general partner. The general partner typically has management control over the partnership and is personally liable for the partnership’s obligations, while the limited partner does not exercise control over the partnership and has limited personal liability. Profits and losses pass through to both general and limited partners for tax purposes.
Limited Liability Company
The limited liability company (LLC) allows companies to elect taxation either as a corporation or pass-through taxation similar to a partnership for its members. An LLC’s members can elect either to manage the LLC themselves or to have managers run the business. Under either election, the members and managers of an LLC are not personally liable for the company’s obligations.
A corporation is a legal entity separate from its shareholders. As such, the shareholders are not personally liable for the corporation’s obligations, and the corporation is a separate taxable entity. The IRS assesses taxes both on the corporation itself and on any distributions paid to the shareholders. A corporation’s board of directors is typically responsible for managing the corporation.
An S corporation operates like a C corporation except that it has elected to be taxed as a partnership rather than be subject to the double layer of taxation of a C corporation. Not all companies are eligible to elect S corporation status; it is typically reserved for small, privately owned companies.
The professional corporation is reserved for the same group of professionals that may form an LLP. Shareholders in a professional corporation are subject to limited liability similar to a C corporation, but the corporation will be subject to a flat tax of 35%.