Compare Types of Companies for the Best Fit

There are many different ways you can structure your business according to legal parameters.  Since each option has different costs and legal obligations, the one you choose depends on the best fit for your business.

Here is a comparative listing of different types of companies to give you an overview and help you decide which option is best for your company:

• Proprietorship
• Partnership
• Limited Partnership
• Limited Liability Company (LLC)
• S-Corporation
• C-Corporation Close
• C-Corporation Stock (Inc.)
• Non-Profit Corporation

Proprietorship

A proprietorship is the easiest business entity to form. The two principal advantages of this type of organizational structure are that the income derived from the business is taxed only one time as personal income, and there are no formal business formalities such as required directors and annual meetings that are required under certain corporate structures. The primary disadvantage is the issue of unlimited liability for the proprietor. The corporate shield that protects individual investor's personal wealth from debts and judgments against the firm is not available for the sole proprietor.

Partnership

A form of business in which two or more persons join their money and skills in conducting the business. Partnerships are treated as a conduit and are not subject to taxation. Various items of partnership income, expenses, gains, and losses flow through to the individual partners and are reported on their personal income tax returns.

There are two types of partnerships; General and Limited. General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. The liability of limited partners is limited to their investment in the partnership.

What's in a partnership agreement?

back to top

Limited Partnership

A limited partnership form of partnership that consists of one or more general partners, who actively engage in the business, and one of more special partners, who are not liable for the debts of the partnership beyond their initial financial contribution. Commercial insurance policies usually differentiate in the "Who Is Insured" section between corporations, partnerships, and other business models. Therefore, the type of model being insured is important.

Maryland forms for forming business entities

back to top

Limited Liability Company

Limited liability companies, or LLCs, are becoming more and more popular, and it's easy to see why. They combine the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. In other words, the owners (or "members") of an LLC are not personally liable for its debts and liabilities, but also have the benefit of being taxed only once on their profits. Moreover, LLCs are more flexible and require less ongoing paperwork than an S-Corporation.

To avoid double taxation, corporations can make a special tax election, known as a "subchapter S election", to be taxed as a flow-through entity like a partnership and LLC. Corporations which make the subchapter S election are known as "S-corporations", and corporations which do not are known as "C-corporations." However, there are still important differences between S-corporations and LLCs.

The Advantages/Disadvantages of LLCs | Steps to form and manage an LLC

back to top

S-Corporation

An S-corporation, is a corporation that elects to be treated as a pass-through entity (such as a sole proprietorship or partnership) for tax purposes. S-corporations are thus not subject to double taxation. Moreover, the accounting for an S-corporation is generally easier than for a C-corporation.

There are certain restrictions placed on S-corporations:

• The S-corporation must not have more than 75 stockholders. (A married couple is treated as one stockholder).
• Each stockholder must be an individual who is a citizen or resident of the United States, or an estate or qualifying trust of such person.
• The corporation must have only one class of stock. (However, voting differences within a class of stock are permissible).
• The corporation must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
• Not more than 25% of the corporation's income can come from passive activities, such as annuities, dividends, rents, royalties, etc.

Corporations wishing to become an S-corporation must file Form 2553 with the IRS, and each stockholder of the corporation must sign the form.
Although S-corporations do not pay federal taxes at the corporate level, they still must prepare a separate tax return. S-corporations file their returns on Form 1120S.

back to top

C-Corporation Close

There are a few minor, but significant, differences between general corporations and close corporations. In most states where they are recognized, close corporations are limited to 30 to 50 stockholders. Many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new shareholders.
This type of corporation is particularly well suited for a group of individuals who will own the corporation with some members actively involved in the management and other members only involved on a limited or indirect level.

Maryland forms for forming business entities

back to top

C-Corporation Stock

The corporate form has become common method for many business organizations. Its separate entity legal standing provides substantial degree of financial protection for its investors. Prior to the creation of the corporate form of business organization, investors in a business were liable for all of the debts the organization. If the business lost money and didn't have the cash to pay its creditors, the partners had to make up the difference with their own money. Corporations now shield the investor from unlimited downside risk. The corporate form created an environment in which more people were willing to invest in business ventures.

A corporation is a separate and distinct legal entity. Corporations can open bank accounts, own property and do business, all under its own name. The primary advantage of a corporation is that its owners, known as stockholders or shareholders, are not personally liable for the debts and liabilities of the corporation. If a corporation gets sued and is forced into bankruptcy, the maximum risk to the investor is the loss of his/her investment. The owners will not be required to pay the debts of the firm with their own money. If, upon liquidation of the assets, the corporation still cannot pay all of its obligations, creditors cannot legally collect what is due to them from the shareholders, directors or officers of the corporation to recover any shortfall unless the debt was personally guaranteed by shareholder, director or officer or fraud is proven.

Recent events involving accounting practices that created false perceptions of revenues and profits that were attributed to officers of some of worlds largest organizations illustrate the fact that their is no absolute protection for decision makers through the corporate shield. Owners of small business corporations often find themselves having to personally guarantee a bank loan for the firm as a condition of the loan agreement.

Details of Incorporation | The Incorporation Process | Types of Stock

back to top

Non-Profit Corporation

To evaluate the tax requirements of each business structure, download our Business Structure Selector template

Business Structure Selector (xls, 43k)

SEE ALSO: IRS.gov/businesses for more detailed information on business taxation laws for all types of companies.

back to top