Business Entity Selection Chart

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Sole Proprietorship

General Partnership

Limited Partnership

Limited Liability Partnership

Limited Liability Company

Subchapter S Corporation

Subchapter C Corporation

Formation

No state filing required. Assumed Name filing required in some cases. No state filing required. Assumed Name filing required if individual names of partners are not all included in the name of the partnership. Statement of Authority is an optional filing. State filing required. Limited Partnership Certificate. State filing required. Statement of Qualification. State filing required. Articles of Organization. State filing required Articles of Incorporation. Articles of Incorporation

Organizational Documents

None. Partnership Agreement. Limited Partnership Agreement Limited Partnership Agreement Member Control / Operating Agreement By-laws, Minutes of Action, Shareholder Agreement, Share Certificates By-laws, Minutes of Action, Shareholder Agreement, Share Certificates

Federal Tax Forms

1040 1065 1065, SS-4 1065, SS-4 1065, SS-4 2553, 1120-S, SS-4 1120, SS-4

Corporate Governance

Self Each partner has equal voice unless partnership agreement provides otherwise General Partners General Partners Members, Managers, Chief Manager, Members outline management control in Operating Agreement; often manager-managed by Chief Manager as opposed to member-managed Directors, Officers, Shareholders, Directors are elected by shareholders to oversee management. Directors hire Officers to run day-to-day operations. Officers report to Directors. Directors, Officers, Shareholders, Directors are elected by shareholders to oversee managment. Directors hire Officers to run day-to-day operations. Officers report to Directors.

Duration

Cessation of business activities or owner’s death Dissolves upon death, disability or withdrawal of one or more partners unless the partnership agreement provides otherwise, or the partners holding the majority of interest elect to continue the the majority of interest elect to continue the general partnership Dissolves upon death, disability or withdrawal of general partner unless the partnership agreement provides otherwise or all limited partners agree in writing to a substitute general partner Dissolves upon death, disability or withdrawal of general partner unless the partnership agreement provides otherwise or all limited partners agree in writing to a substitute general partner Default is perpetual unless determined at time of filing to be of limited duration Perpetual Perpetual

Operational Requirements

None Relatively few legal requirements Relatively formal; many requirements mirror that of a small business corporation Relatively formal; many requirements mirror that of a small business corporation Relatively flexible: cross between partnership and corporation, so some requirements but far less formal than corporations Formal; requires Directors and Officers; Annual Meeting of Shareholders; and ongoing record of activities in Minutes of Action Formal; requires Directors and Officers; Annual Meeting of Shareholders; and ongoing record of activities in Minutes of Action

Raising Capital

Friends and family. Partners Limited Partners Limited Partners Members Shares are sold to raise capital Shares are sold to raise capital

Taxation

Not a taxable entity. Owner pays all taxes on personal tax return Not a taxable entity. Pass-through treatment of profits and losses. Profits are taxed at the individual partner level based on their proportionate share. Partners can deduct their proportionate share of losses against other income Not a taxable entity. Pass-through treatment of profits and losses. Profits are taxed at the individual partner level based on their proportionate share. Partners can deduct their proportionate share of losses against other income. Not a taxable entity. Pass-through treatment of profits and losses. Profits are taxed at the individual partner level based on their proportionate share. Partners can deduct their proportionate share of losses against other income. Disregarded entity for federal tax purposes. Profits are taxed at the individual member level based on their proportionate share, unless otherwise determined by members. Pass-through treatment of profits and losses. A domestic LLC with at least two members that does not file Form 8823 classified as a partnership for federal income tax purposes. S Corporation may have tax on certain capital gains or passive income Profits are taxed at the individual shareholder level based on their proportionate share C Corporation suffers “double taxation” Profits are taxed separate from its owners. Taxed at the corporate level and again at the shareholder level (dividends)

Liability

Unlimited Unlimited; partners have joint and several liability for partnership debts and third-party claims Limited Partners have limited liability for debt or third-party claims but not beyond that of their capital contribution; General Partners have joint and several liability for all obligations of the partnership. Partners in LLPs are generally not liable for the mal-practice and other wrongful conduct of fellow partners; states are divided on whether partners are individually liable for the partnership’s commercial debt. Members are not personally liable for the debts and third-party claims of the company, provided basic corporate formalities are complied with Shareholders are not personally liable for debts and third-party claims of the corporation; Directors are only in extraordinary circumstances. Shareholders are not personally liable for debts and third-party claims of the corporation; Directors are only in extraordinary circumstances.

Risk Management

Difficult. Personal assets are subject to all debt and third-party claims; business liability insurance, if available, is expensive Moderately Difficult. Personal assets are subject to third party claims; business liability insurance expensive to obtain. However, partnership liabilities spread among all partners, reducing exposure. Yes as to limited partners; purpose of this form of entity is to attract investors who invest knowing the risk is limited to their contribution; Unlimited for general partners, so it is difficult to address Not transferable without agreement of all partners. Yes as to limited partners; purpose of this form of entity is to attract investors who invest knowing the risk is limited to their contribution; Unlimited for general partner. Not transferable without agreement of all partners. Moderate. LLC viewed as legitimate business form even though a hybrid entity. Business liability insurance readily available. Has advantage of the “corporate veil” against personal liability. Simple. Corporate veil protects shareholders and directors from personal liability for the debts and third party claims of the corporation. Corporate entity easily insurable. Simple. Corporate veil protects shareholders and directors from personal liability for the debts and third party claims of the corporation. Corporate entity easily insurable. Shares of stock freely transferable

Transferability of Interest

N/A Not transferable without agreement of all partners. Dependent upon terms of Operating Agreement, membership interests might be sold to third parties Shares of stock transferable but only to extent consistent with IRS requirements for ownership make-up

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