Choice of Entities | Bailey Law Corporation | William Bailey Attorney ...

Forms of Business Organizations

OVERVIEW

Sole Proprietorship

Owned and operated by a single individual.? All income and expenses are reflected in their personal (individual) tax return.? The business is not a separate entity and does not shield the individual from personal liability.

Corporation (C Corporations)

A separate legal entity (fictitious legal entity), most commonly used for operating a large business.? The benefits are that corporate law is well developed in most states.? The corporate form can generally protect owners from individual liability, providing that corporate formalities are followed.? Corporations are sometimes used in small businesses (closely-held) because the owners wish to insulate themselves from personal liability.? However, there is separate tax at the corporate level.

Partnerships

General Partnership

The partners have unlimited liability and generally are bound by the acts of the other partners.? General partners ordinarily are personally liable for partnership debts and liabilities.

Limited Partnership

In this entity, there are both a general partner(s) and a limited partner(s).? The general partner manages the business and the limited partners typically have no role in management.? The general partner has unlimited liability, however the limited partners are not personally liable for partnership debts (except to the extent of their capital contributions).

Limited Liability Partnership

These are permissible in some states.? In California, the LLP is used for personal service corporations such as a law firm.? They are similar to an LLC (discussed below).

Limited Liability Company

More commonly known as an LLC, is a non-corporate entity.? It is permitted under the laws of every state.? LLC?s are owned by their ?members?, and enjoy limited liability for the debts of the LLC (liability is generally limited to their capital contributions).? An LLC is organized by an operating agreement (similar to a partnership agreement).? Unlike a partnership, an LLC can have one member (often referred to as a ?single member LLC?).? However, when an LLC has more than one member, they are treated as partnership for tax purposes.

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TAX CONSIDERATIONS

Subchapter C

All corporations other than ?S? corporations are ?C? corporations.? C corporations are a seperate taxpaying entity.? The taxable income of a C Corporation is subject to tax at graduated rates.

Subchapter K

This section covers partnerships and LLC?s.? They are not treated as separate taxpaying entities (similar to S-Corporation with some major differences).? Partnership income and deductions pass through to the individual partners and are taxed at the partner level.? However, a partnership is treated as a separate entity for accounting purposes and must file informational returns with the IRS, which shows how all items of income and deductions are allocated to the partners.

Subchapter S

This section governs the tax treatment of ?S corporations?.? S corporations are pass through entities and the entity is generally not subject to tax (however there are a few exceptions).? Unlike an LLC, an S corporation is formed as Corporation and then elects tax treatment under Subchapter S.? In order to qualify for subchapter S, S corporations can only have one class of stock and no more than 100 shareholders, all of whom must be US citizens or residents.

DOUBLE TAXATION

The earnings of C corporations are taxed once at the corporate level when earned and again when distributed as dividends to shareholders.? Partnerships and S corporations, as pass through entities are generally not subject to an entity level tax on either operating income or asset appreciation.? This is a major incentive to many individuals chose either S corp. status or partnership status over the more traditional C corporation.

Source: http://williamrbailey.com/2012/09/choice-of-entities

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