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Business Forms & Structures:
There are many entity types and structures. Some are simple, some are more complex. Each offers a series of different benefits and qualities. The key is to select the best one for your particular business in order to maximize its benefits. The following discussion outlines the most common entity types: The Sole Proprietorship:
In General: This is the simplest form of business. A sole proprietorship is not a separate corporation or LLC itself. Rather, a sole proprietor directly owns the business and is directly responsible for its debts.
Unlimited Personal Liability for Loss: In a sole proprietorship, the owner is personally liable for the company, thus placing his or her entire personal assets and wealth at risk. If an owner is married, that owner puts the community property at risk as well.
Management and Control: The owner (sole proprietor) has total management and control over the company. However, the price for total management and control is that the owner is at risk for personal liability incurred through the acts of the owner’s agents or employees.
High Taxes: In a sole proprietorship, the profits are subject to self-employment tax of approximately 15%. This is in addition to the ordinary income taxes owed for federal and state taxes. For example, if a sole proprietorship earns $50,000, a 15% tax of approximately $7,500 would have to be paid in addition to regular federal and state taxes which could be as high as 40%.
Ease in forming: For most states, a sole proprietorship has minimal costs and efforts to set up. Normally a simple filing with the local government or city is all it takes. The Corporation:
In General: A corporation is a separate and distinct legal entity. To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency.
Management and Control: Normally, a corporation's management and control is vested in the board of directors who are elected by the shareholders of the corporation. Directors generally make policy and major decisions regarding the corporation.
Ownership: Shareholders are the owners of a corporation.
Separate Tax and Legal Life: A C-corporation which is properly formed and operated assumes a separate tax and legal life distinct from its owners/shareholders.
Number of Persons Required: In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.
Limited Personal Liability: Shareholders are usually not personally liable for the debts and liabilities of the corporation. For example, if a corporation gets sued and is forced into bankruptcy, the owners will not be required to pay the debt with their own money. If the assets of the corporation are not enough to cover the debts, the creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.
Piercing the Corporate Veil: If corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
Duration of a Corporation: As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers , or directors or by transfer of its shares from one person to another.
Choosing a Name: In general, the name of a corporation must end with "incorporated," "corporation," "corp" or "Inc." A name will not be accepted if it is likely to mislead the public or if it too closely resembles the name of another corporation formed in that state.
Tax Forms and Licenses: Every corporation must obtain a federal tax identification number, which is similar to an individual's social security number. Some states also require a separate state tax number. In addition, county and city business licenses may be required. The Professional Corporation – PC:
In General: Most corporations are formed as general, for-profit corporations. However, where the corporation will be engaging in what your state might call "professional services," the Articles of Incorporation must bear special language and the corporation must be formed pursuant to certain statutory provisions.
Definition of a Professional Service: "Professional Services" according to most states usually consists of the following business activities: -
Medical Services
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Legal Services and Representation.
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Accounting and Financial Services.
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Architectural Services.
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Engineering Services.
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Other services may be included in this list depending on your selected state of incorporation
Annual Tax Filings: A Professional Corporation may operate as a C-Corporation or an S corporation, if it qualifies. The C-corporation files its own annual corporate tax forms each year using IRS form 1120. The S-Corporation uses form 1120S. Requisite State forms may also be required.
Comments: We recommend that you seek proper advice if you fall within the "Professional Services" statute of your state. Please be advised, most states vary in their requirements regarding licensing of professional activities. The Partnership:
In General: A partnership is a type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts. Other individuals called limited partners may invest but not be directly involved in management and are liable only to the extent of their investments.
Liability Exposure: Unlike an LLC or a corporation, in a partnership the partners share personal responsibility for the company's debts and liabilities.
Pass-Through of Income or Loss: The partnership itself does not pay federal income taxes, but each partner has to report their share of partnership profits or losses on their individual tax return. Therefore, the partnership “passes-through” it’s income or loss to the partners. Estimated tax payments are also necessary for each of the partners for the year in progress.
Annual Tax Filings: A partnership files its own annual partnership tax forms each year using IRS form 1065. Requisite State forms may also be required.
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