Choose a Corporate Structure

Careful consideration should be given to a company’s legal structure. Some questions to ask:

• How many owners will there be?
• How important is it to limit personal liability for debts or claims against the business? In general, incorporating is the best means of limiting liability.
• Which business structure will result in the lowest taxes? There is no universal answer to this question. Tax-wise, however, some structures are better than others.

The Department of Consumer and Regulatory Affairs can provide general information on each structure but strongly suggests you contact an attorney and/or an accountant before making a final decision on what structure best suits your business needs.

Sole Proprietorship

A business that is owned by a single individual.

Advantages

• Easiest and least expensive to set up
• Full control over all business decisions
• Minimal legal restrictions or requirements
• Owns all profits and reaps all benefits
• Not required to pay unemployment taxes

Disadvantages

• Personally liable for all business transactions
• May have difficulty obtaining long-term financing
• No unemployment benefits if the business fails
• Only limited tax savings

General Partnership

A business owned by two or more persons who have agreed—verbally or in a formal written statement—to operate a business.

Advantages

• It is easy to establish
• The partners share workload and responsibilities
• Financing is easier to obtain than for a sole proprietorship
• The partners share all profits and reap all benefits of ownership

Disadvantages

• May be more expensive to start
• The partners have unlimited liability for business expenses
• Each partner is bound by the actions of the other partner
• Decision-making authority is divided
• Loss of one partner may dissolve the business
• Partnership may be difficult to end

Limited Partnership

A business similar to a general partnership, however, one invests assets into the business at their own risk and is limited to the amount of capital invested. The investor is not involved in management and does not share in the liability for debts or losses.

Advantages

• Relatively easy to establish
• Partners share in start-up expenses
• Financing is easier to obtain than for a sole proprietorship
• Partners share all profits and reap all benefits of ownership
• Limited Partnership partners’ assets are not at risk from creditors

Disadvantages

• More expensive to set up initially, due to the requirement for a written agreement
• Operating (general) partner has unlimited liability for business expenses
• Loss of one partner may dissolve the business
• Partnership may be difficult to end

Limited Liability Partnership (LLP)

A business where partners are given the same limited liability protection as professional corporations.

Advantages

• Tax advantage of flow-through tax treatment for LLP partners
• Not subject to the numerous limitations regarding ownership, capital structure and division of profits
• Simple and familiar for an existing partnership to elect to become an LLP

Disadvantages

• A sole owner cannot set up an LLP as a partnership, an LLP must have at least two partners to exist

C (General) Corporation

A business formed by law as a separate legal entity from its owners (stockholders and shareholders). 

Advantages

• Has a lifespan independent from its owners (stockholders)
• Fringe benefits costs are tax-deductible
• Personal assets are protected from business liability
• Ownership can be transferred through the sale of stock
• Easy to raise operating capital through the sale of stock
• Ownership can change without affecting its day-to-day management

Disadvantages

• Incorporating involves considerable start-up expenses
• Subject to more district and federal legislation
• Corporate earnings subject to double taxation
• Many legal formalities exist when filing and trying to maintain corporate status
• Activities are limited

S Corporation

A business similar to a General Corporation, with the exception of specific IRS requirements.

Advantages

• Already exists as a corporation
• Corporate earnings avoid double-taxation

Disadvantages

• Difficult to qualify for IRS requirements

Limited Liability Company (LLC)

An LLC is a hybrid business that draws advantageous characteristics from both corporations and partnerships.

Advantages

• Profits and losses pass through the company to its owners for tax purposes
• Personal assets are protected from business liability
• No limitation on the number or nature of owners
• Simpler to operate than a corporation
• Not subject to corporate formalities
• Owners may participate in management of the business

Disadvantages

• Legal assistance is needed to properly set up and structure an LLC
• Professionals—such as lawyers, architects, accountants, engineers and doctors, etc.—shall register Professional LLC (PLLC).

Nonprofit

An organization that has no owners, gives no income (except salaries/expenses) to members, directors or officers and must have a Board of Directors.

Advantages

• Tax Exemption
• Business Operation Flexibility

Disadvantages

• Merger limitations

Service Need

Corporate Registration

Service at a Glance

Request this Service

Related Services

Related Documents

Related News

Related Photos

Related Videos