A corporation is an entity where the interest is held by shareholders, and whose business is conducted by a board of directors. The shareholders have limited liability, and can normally transfer their interest freely without affecting the existence of the entity. Corporations are normally subject to double taxation; that is, the profits of the corporation are taxed, and the shareholders’ income is taxed when they receive it. This traditional form of a corporation is also known as a “Subchapter C Corporation,” because it is governed by Subchapter C of the Internal Revenue Code.
An S Corporation has the all the same characteristics of the Subchapter C Corporation, but simply elects to be taxed under Subchapter S of the Internal Revenue Code. In doing so, some other restrictions come into play. It is limited to 75 shareholders, and shareholders can only be individuals, estates or certain trusts. S Corporations allow their shareholders to have limited liability and, most importantly, pass-through taxation, which means that the shareholders, and not the corporation, are taxed. S Corporations can only have one class of stock, and the stock cannot offer preferences to different shareholders (i.e. they can not have preferred stock and common stock). If an S Corporation does not comply with all of the technical requirements to maintain its qualification as a “small business corporation,” the corporation will be ineligible under subchapter S for five years. There are some states, however, that may not allow S Corporations to have pass-through taxation under state tax law.
Limited Liability Companies (LLC)
A form of business authorized by statute in Minnesota in 1993, an LLC combines the limited liability of a corporation and the pass-through taxation of a partnership. It’s as simple to create as a corporation. Unlike corporate shareholders, its owners can participate in the management of the company. An LLC can have an unlimited amount of owners, and can be as small as a single individual. There are no restrictions on who can be an owner of an LLC, and all owners have limited liability.
A general partnership is an association of two or more persons that is not organized as a corporation, where the partners agree to share in the profits and losses. Each partner is personally liable for the debts of the partnership. The income of the partnership is taxed at the individual level, not the entity level. Minnesota has adopted the Revised Uniform Partnership Act (RUPA), which creates default rules if the general partnership agreement is silent on the issue, or if there is no partnership agreement.
A limited partnership is a partnership consisting of one or more general partners, and one or more limited partners. The general partners are personally liable for the debts of the partnership, and can conduct the day-to- day business of the partnership. In contrast, the limited partners enjoy limited liability, but can lose such limited liability if they perform any function within the partnership other than invest capital. The limited partnership is only taxed at the individual level. Minnesota has adopted the Revised Uniform Limited Partnership Act (RULPA), which creates default rules if the limited partnership does not have a partnership agreement or is silent on an issue. In many cases, lawyers will create a limited partnership where the general partner is a corporation, which would, in effect, create limited liability for the general partner. The problem with this situation is that it is complicated and expensive to set up and maintain.
Limited Liability Partnership (LLP)
A limited liability partnership is simply a general partnership that elects to have limited liability for its partners. It is also governed by RUPA. Unlike a limited partnership, it allows all the partners to enjoy limited liability AND participate in the day-to-day functions of the partnership. Because it is a partnership, it is only taxed at the individual level.
Limited Liability Limited Partnership (LLLP)
A limited liability limited partnership is simply a limited partnership that elects to have limited liability for all its partners, including its general partners. It enjoys taxation only at the individual level, and is governed by RULPA. This is a new form of business entity, having been adopted in Minnesota in 1998.