Choice of Entity Quick Comparison Table 

© Oldani Entrepreneurial Law, P.C. 2013

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ATTRIBUTES
SOLE PROPRIETORSHIP
PARTNERSHIP
C-CORPORATION
S-CORPORATION
LLC
Description: No separate legal entity. A single individual doing business. A separate legal entity. Two or more persons carrying on abusiness or trade and sharing risks and profits. A separate legal entity incorporated under a state business corporation statute. This is the classic regular corporation. A domestic U.S. C-corporation that elects to be treated as a passthrough entity for federal tax purposes. (No foreign corporations may become S-corporations.) A separate legal entity with some corporate, some partnership characteristics, created by state statute. Owners are called members.
Management Structure: A single individual; a dictatorship.

General Partnership (GP): Two or more persons sharing management; a democracy.

Limited Partnership (LP): At least one manager; a dictatorship or democracy.

Hierarchical; owners elect managers, managers direct and elect officers, officers execute conduct. Hierarchical; owners elect managers, managers direct and elect officers, officers execute conduct.

Member-managed: members share management; a democracy.

Manager-managed: Hierarchical combo- members elect at least one manager; management may be dictatorship or democracy.

Lifespan of the Business Form Ends when proprietor stops or dies. Ends when a partner withdraws or dissociates. May exist in perpetuity regardless of changes in ownership or management. May exist in perpetuity regardless of changes in ownership or management, provided new owners are eligible. May exist in perpetuity regardless of changes in ownership or management.
Liability: Unlimited personal.

GPs: Unlimited personal.

LPs: Limited.

Limited Limited Limited
Federal Tax Basics: Personal Income, Self-Employment, any Employer’s Withholding (get EIN). You cannot deduct your own wages. Partnership files informational return. Partners pay tax on their share of income and losses. Special allocations allowed if substantial economic effect. All partnership debts used to calculate partner’s basis. Partnership may make basis adjustments. Cannot deduct partners’ distributions. Separate entity taxation at corporate tax rates. Corporation pays income/estimated tax, applicable employment and excise taxes. Taxed on gain of appreciated assets. May deduct employee fringe benefits, exclude/defer certain gains, and carry certain losses. May deduct officer and shareholder-employee reasonable compensation. Shareholders pay tax on dividends. Corporation files informational income return, pays employee withholding and any excise taxes. Shareholder-employee compensation subject to withholding, but shareholder distributions not. Shareholders pay personal tax rates on pro-rata share of income/losses. No special allocations. Fringe benefits included in compensation of shareholders owning 2% or more interest. Shareholder basis includes corporate debt to that shareholder, but not general corporate debt. Generally eligible for tax-free merger with C-corp. Former C-corp taxed on gain from appreciated assets. No distinct federal LLC taxation scheme exists. Each LLC treated for tax purposes like another form of business. Single member LLCs default to sole-proprietorship (disregarded entity) taxation. Multi-member LLCs default to partnership taxation. Any LLC may elect C-corp or S-corp taxation.
Getting Paid: Business income is your personal property. You are not an employee. Partners receive distributions from the partnership. Shareholders may receive dividends.  Shareholder-employees may receive employee compensation.  Officers may receive employee compensation.  Directors may receive independent contractor compensation. Shareholders may receive dividends.  Shareholder-employees may receive employee compensation.  Officers may receive employee compensation.  Directors may receive independent contractor compensation. Members and employees receive distributions or compensation. These payments are characterized, treated, and taxed according to taxation type.
Eligible Owners: Any individual. Any individual or entity. Any individual or entity. A maximum of 100 eligible shareholders; only individual U.S. citizens or residents, certain tax-exempt organizations, certain trusts, and estates during normal administration. No partnerships, corporations, or nonresident alien individuals. Families count as one (1) shareholder, but each person must be eligible. Any individual or entity.
Classes of Ownership Allowed: One owner. Multiple classes with differing rights. Multiple classes with differing rights and preferences. Only one class of stock allowed, but may vary voting/non-voting rights. Multiple classes with differing rights.
Transferable Ownership Interests: Business indivisible from owner. No transferable ownership interests. (All businesses may transfer assets.) Only partners’ rights to receive distributions generally transferable, not partners’ rights to make management decisions. Shareholders’ entire interest, including distribution, voting, and any other rights and preferences. Shareholders’ entire interest, including distribution and voting, but transfer restricted to eligible shareholders. Only members’ rights to receive distributions generally transferable, not members’ rights to make management decisions.
Duties of Owners and Managers: No fiduciary duties.

GPs: Fiduciary duties of loyalty and care.

LPs: No fiduciary duties.

All: Duty of good faith and fair dealing.

Directors owe fiduciary duties of loyalty and care. Directors owe a duty of good faith and fair dealing. Directors owe fiduciary duties of loyalty and care. Directors owe a duty of good faith and fair dealing. Managers, or members who are managers, owe fiduciary duties of loyalty and care, and an obligation of good faith and fair dealing.
Minimum Essential Steps to Business Formation: Engage in a trade or business. That’s it.

GP: Formed when two or more persons engage as co-owners in a business for profit.

LP: Choose distinguishable LP name, determine registered agent/office, execute partnership agreement, execute and file certificate of limited partnership + fee.

Choose distinguishable Corp name, determine registered agent/office, determine stock issues, determine board of directors, execute and file articles or certificate of incorporation + fee, execute bylaws, hold organizational meeting (elect/affirm board, adopt bylaws, elect officers).

Form a C-corporation and obtain EIN, then:

1. File IRS S-corp election, Form 2553, not later than two (2) months and fifteen (15) days after start of tax year in which desired, or prior to start of year desired. Maintain record of certified mailing.

2. Confirm IRS receipt of form and acceptance of election.

Choose a distinguishable LLC name, determine registered agent/office, determine management type (if applicable), execute and file articles or certificate of organization. (Operating agreement generally not required for formation, but recommended for governance.)
Minimum Essential Steps to Business Compliance: Register any assumed name. Acquire licenses. Determine and meet federal, local, industry compliance obligations. Get EIN, if employees. Get any required state tax ID. Register any assumed name. Acquire licenses. Determine and meet federal, local, industry compliance obligations. Get EIN. Get any required state tax ID. Acquire licenses. Determine and meet federal, local, industry compliance obligations. Get EIN. Get any required state tax ID. Acquire licenses. Determine and meet federal, local, industry compliance obligations. Get any required state tax ID. Acquire licenses. Determine and meet federal, local, industry compliance obligations. Get any required federal and state tax IDs.
Minimum Annual State Business Formalities: None

GP: Maintain books and records; make information available to partners.

LP: File annual report + fee and any other required forms; maintain books and records; make information available to partners.

File annual report + fee, and any other required forms. At least one (1) annual shareholders’ meeting with minutes and records. At least one (1) annual board meeting with minutes and records. Maintain books and records; make information available to shareholders. File annual report + fee, and any other required forms. At least one (1) annual shareholders’ meeting with minutes and records. At least one (1) annual board meeting with minutes and records. Maintain books and records; make information available to shareholders. File annual report + fee, and any other required forms. Maintain books and records; make information available to members.
Comments: Please plan for personal liability! Execute a partnership agreement! Being an individual GP increases personal liability exposure! Established business form, developed caselaw, ability to raise efficient capital/diversify risk/incentivize employees. Some tax benefits, but separate corporate and dividend taxes, asset gains, disadvantageous. MUST realize entity/owner separation! Established business form, developed caselaw. Restricted ownership, restricted share transferability. Benefit of pass through taxation with other corporate tax benefits, but asset gains still taxed to former C-corp. Taxation type may be disharmonious with investor tax needs. Eligible for tax-free corporate merger. Easily convertible to C-corp. MUST realize entity/owner separation! Popular business form for combining limited liability and flexible, tailor-made structuring with choice of tax treatment. Newer entity, less developed caselaw, treated differently by different states = may be challenging for 3rd parties. Taxation type may be disharmonious with investor tax needs.