Choose Your Business Entity

As you start a new business or expand an existing enterprise, you will benefit
from considering your options for the legal structure of your business. It
will usually be beneficial to seek advice from legal and financial professionals,
in determining the form which will best serve your business and tax planning
needs.

The Sole Proprietorship

A sole proprietorship is the simplest
form of business to start. Ordinarily, all you need to do is start operating
as a business under your own name (or a fictitious name - a d/b/a) and Social
Security number, obtain any required licenses or permits, and you're in business.
But there are some distinct disadvantages to operating as a sole proprietorship,
which you should consider when determining if this business form is right
for you. A sole proprietorship is subject to pass-through taxation, with profits
declared on the owner's personal tax return. There is also no shield against
liability, and a sole proprietor's personal assets can be reached to satisfy
business debts or liabilities. By definition, a sole proprietorship has only
one owner. If you have a business partner, you may be a partnership or choose a different business form, but you cannot operate as a sole proprietorship.

The Partnership

The partnership is a business entity ordinarily
comprised of two or more individuals, although under some circumstances a
partnership will be formed between other business entities, or between individuals
and a business entity. The partnership is relatively inexpensive and simple
to create and maintain, but poses tax and liability issues which are similar
to those of a sole proprietorship.

General Partnership - Most partnerships take the form
of "general partnerships", where all partners have some management
authority.

Limited Partnership - In a limited partnership, there
are one or more "general partners" who direct the business of
the partnership, and one or more "limited partners" who have no
management role. The general partner may be another business entity, such
as a corporation or LLC. This structure is often used for real estate transactions,
where investors sign on as limited partners, and the general partner manages
the property. Limited partners have little or no role in the management
of the business, and in return for surrendering that authority their responsibility
for business debts and liabilities is limited to the amount of their investment.

Limited Liability Partnership - The partners to a limited
liability partnership are shielded against the debts and obligations of
the partnership, and against liability for actions of their partners or
employees in which they take no part and have no supervisory role. However,
their personal assets may remain subject to other debts they have personally
guaranteed, and for obligations or liabilities arising from their own conduct.

The Limited Liability Company

A limited liability company,
or LLC, is a business entity that enjoys many of the advantages of being a corporation, including limited liability, while
avoiding many of the more singificant burdens imposed on corporations, and
while retaining many of the characteristics of unincorporated entities such
as partnerships and sole
proprietorships. By default, an LLC has pass-through taxation, with members
declaring their share of profits as income on their personal tax returns.
An LLC may opt to be taxed in the same manner as a C
Corporation, in the event that it would benefit from being able to retain
income and pay taxes on that income at the corporate tax rate.

The Corporation

A corporation is a business entity created
under state law, which stands as an independent legal "person" apart
from its shareholders and directors. Accordingly, a corporation may enter
into contracts, obtain loans, and pay taxes on its own behalf, and it continues
to exist even after its founders or shareholders die or transfer their shares
to others. A corporation's owners or shareholders receive the benefit of limited
liability for the obligations of the corporation, and are thus ordinarily
shielded from the corporation's creditors even in the event that the corporation
cannot pay its obligations. Unless limited by state law or its own articles
of incorporation, a corporation continues indefinitely. Ownership can be transferred
through sale of stock, and the sale or transfer of a controlling interest
in the corporation does not necessarily affect its management structure or
operations.

C Corporation - A C Corporation is a standard business corporation, which pays taxes on its profits at the
corporate tax rate under Subchapter C of the tax code.

S Corporation - An S Corporation is a corporation which has elected for its profits to be taxed in the manner
of an unincorporated entity. Not all corporations can opt to become S Corporations.

Professional Corporation (PC) - A special type of corporation
incorporated to perform professional services, such as the practice of law
or medicine. (Historically, professionals were not permitted to incorporate.
Now, many professional practices incorporate as PC's or LLC's.)

Nonprofit Corporation - A nonprofit corporation obtains
special treatment under state law, but is subject to restrictions as to
its ownership and to what may be done with its profits at the end of the
year. While a corporation must be a nonprofit in order to qualify for a
federal tax exemption as a "501(C)(3)" charitable organization,
the mere fact that a corporation is registered as a nonprofit does not mean
that the corporation is a "charity" contributions to the corporation
are automatically tax deductible.