One of the essential tasks in beginning or upgrading an entrepreneurial endeavor is to select the appropriate business structure. All businesses will adopt one of the following, the sole proprietorship, the partnership, the corporation or the limited liability company. Each has pros and cons which should be evaluated prior to making this decision. Here at Speedy, it is assumed that either the corporation or the limited liability has been selected since you are at this stage and are now choosing which structure. Speedy is a formation service and will not make any specific recommendations as to the type of structure to choose.
Both the corporation and the limited liability company offer liability protection for the owners. One chief difference is the way that each entity is taxed. The owners of the corporation are taxed twice, once at the corporate level and then when passed through to the owners, unless the corporation elects to be treated as an S corporation, flowing the profits down to the owners and getting taxed only once. The limited liability company profits are passed through to the owners and taxed only once. In regards to fringe benefits, such as health care, life insurance, retirement packages, etc. the corporation receives favorable tax treatment in regards to the deductibility of such expenses and are not considered income to the employee. The IRS defines the term employee restrictively and for the owner of a business to be termed an employee, the entity must be a corporation. The owner of the limited liability company, not classified as an employee, must include the cost of the fringe benefit as gross income.
| Entity Type | Rules of Ownership | Personal Liability of Owners | Income Tax Treatment | Documents Needed for Formation | Business Management | Capital Contributions |
| C Corporation | The C Corporation is a separate legal entity. There is no limitation on the classes of stock or the number of shareholders. | Generally, no personal liability of shareholders for corporate obligations. | The corporation is taxed as a separate entity. Shareholders are taxed on dividends if the company distributes dividends. | Articles of incorporation. These vary from state to state. Stock certificates and ledger, bylaws and any resolutions. | Shareholders elect a board of directors who appoint officers to carry out the day-to-day operations. | Shareholders contribute collateral by purchasing stock in the corporation. |
| S Corporation | Only one class of stock and shareholders are limited to 100. | Generally, no personal liability of shareholders for corporate obligations. | Corporate profits and losses are passed through to the shareholders. | Articles of incorporation. These vary from state to state. Stock certificates and ledger, bylaws and any resolutions. S corporation election form. | Shareholders elect a board of directors who appoint officers to carry out the day-to-day operations. | Shareholders contribute collateral by purchasing stock in the corporation. |
| Limited Liability Company (LLC) | No limits on the amount of members. | Generally, no personal liability for company obligations by members. | Taxed according to the IRS classification chosen. | Articles of organization. These vary from state to state. Operating Agreement. | Operating agreement determines management. | Capital is contributed by members in exchange for interest in company profits and losses. |
| Limited Liability Partnership (LLP) | No limit on the amount of partners. Partners may be limited or general. | Generally, no personal liability for company obligations by limited partners unless stated in agreement. | Profits and losses are passed through to partners as per the agreement. | Partnership agreement. These vary from state to state. | Business is managed by general partners or as set forth in the agreement. General partners typically carry liability of the LLP. | Capital is contributed by partners in exchange for interest in company profits and losses. |
| Sole Proprietor | Business is owned by an individual. | Business owner is personally liable for business obligations. | Profits and losses are passed through to business owner’s personal tax return. | Any required state or municipal licenses or registrations for the business type. | Business is managed by the individual owner. | Individual owner contributes all capital. |
If you form a corporation, the entity can elect to be taxed just the same as an LLC could be taxed. If you form an LLC, the entity can elect to be taxed just the same as a corporation. Basically, the type of entity you form is irrelevant now. The IRS will let you decide how you want to be taxed regardless of what entity you actually formed.
