Wednesday, October 25, 2017

Forms of Business Entities in the US


SOLE PROPRIETORSHIP
GENERAL PARTNERSHIP
LIMITED PARTNERSHIP
LIMITED LIABILITY PARTNERSHIP (LLP)
LIMITED LIABILITY LIMITED PARTNERSHIP (LLLP)
C CORPORATION
S CORPORATION
LIMITED LIABILITY COMPANY (LLC)
SERIES LIMITED LIABILITY COMPANY (SERIES LLLC)
PROFESSIONAL CORPORATION (PC)
NON-PROFIT
B CORPORATION



SOLE PROPRIETORSHIP

A sole proprietorship is owned and run by one individual (although a husband and wife can qualify as sole partnership) who is personally liable for all losses and debts. It is the most common form of starting a new business because it is the simplest and least expensive type of business to establish.
Pros:
Can be established instantly without filing any paperwork.
Profits or losses reported on a federal Schedule C. No separate tax filing required.
No need to pay unemployment tax on oneself.
Cons:
Unlimited personal liability. Purchasing insurance is highly advisable.
Investors tend to disfavor SPs and prefer a more formal entity.


GENERAL PARTNERSHIP

General Partners share equally in management and profits of GP. Profits are taxed as personal income for the partners.
Pros:
Easy to set up without filing with the state or formal agreement between the General Partners. Written formal agreement, however, is advised to prevent potential misunderstandings.
- Easy to dissolveIf the GP was created for a specific task, it is dissolved automatically upon completion of that task.
- No estimated tax requirements in California.
Cons:
Each General Partner is jointly and severally liable for the debts of the partnership and other partners. Insurance advised.
Investors may prefer a more formal entity.


LIMITED PARTNERSHIP

An LP has at least one General Partner and at least one limited Partner. GP has unlimited responsibility and is primarily responsible for business affairs of the entity, while LP’s liability is limited to his/her capital contribution, unless the partners agree otherwise. To form an LP in California, a Certificate of Limited Partnership (Form LP-1) must be filed. A limited partnership formed in another state must register with the California Secretary of State prior to conducting business in California. A California LP must pay an annual tax of $800.
Pros:
Relatively easy to set up.
More flexible apportionment of risk and management responsibilities than GP.
LP is not taxed as an entity. Instead, partners file their personal income tax returns and may offset losses against their income from other sources.
Cons:
Limited Partner has limited decision-making authority within an LP.
General Partner has unlimited personal liability.



LIMITED LIABILITY PARTNERSHIP (LLP)

All LLP partners enjoy limited liability protection but may participate in managing business affairs just like general partners. In California, LLPs are limited to individuals licensed to practice in the fields of public accountancy, law, architecture, engineering or land surveying. An LLP formed in another state must register with the California Secretary of State prior to conducting business in California.
Pros:
Partners’ personal assets are shielded from liability.
- Partners may be shielded from liability for actions of other partners, although they remain liable for own wrongdoing.
All partners may actively participate in the management affairs.
LLPs are not taxed on their income; partners file their own individual tax returns instead. (Note: in California, LLPs still pay $800 per year for the privilege of doing business in the state).
 Cons:
- Limited to specific professional services in California.
- California, and a number of other states, require insurance.

LIMITED LIABILITY LIMITED PARTNERSHIP (LLLP)

An LLLP must have at least one general partner and at least one limited partner, just like a Limited Partnership. The main advantage of an LLLP is that it limits the general partners’ personal liability for obligations of an LLLP. LLLPs cannot be formed in California, but an out of state LLLP will be allowed to do business in the state upon registering with the California Secretary of State and paying an annual tax of $800. Nevada allows formation of LLLPs.


C CORPORATION

A corporation is a legal entity that is owned by its shareholders (owners). Since it’s an entity separate from its shareholders, the owners are shielded from personal liability for the debts and obligations of the corporation. C Corporation is the most common form. C Corp is taxed under Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it chooses to be taxed under Subchapter S. C Corps are subject to double taxation: first, C Corp itself is taxed annually on its earnings; and second, the shareholders are taxed when they receive these earnings as dividends. A California C Corp is taxed on its net income at a rate of 8.84 percent; it is also subject to a minimum annual franchise tax of $800. The estimated annual tax must be paid in four installments.
C Corp. must adhere to certain formalities in order not to lose its corporate status and protections. For example, it must create bylaws that regulate shareholder meetings, define the scope of directors’ authority, etc. 
Pros:
- Generally, no personal liability.
Ownership can be transferred easily through the sale of stock.
- Corporation survives owners' death.
- Owners can issue and sell stock to investors to raise capital.
Cons:
- More costly to set up and maintain than a sole proprietorship or a partnership.
Possible double taxation.
- Ongoing filing and reporting requirements.


S CORPORATION

An S Corp is a regular corporation or any business entity, (i.e. a partnership or LLC that chooses to be taxable as a corporation), that elects to be taxed under Subchapter S of the federal tax code. S Corp is not taxed at the entity level, and profits flow directly to the owners. California S Corp is taxed on its net income at a rate of 1.5 percent. The estimated annual tax must be paid in four installments.
Pros:
Avoid double taxation.
- Generally, no personal liability.
- Generally, survives its owners’ death.
Cons:
- Can have no more than one class of stock.
- Ongoing filing and reporting requirements.
- One hundred shareholders max.


LIMITED LIABILITY COMPANY (LLC)

LLC combines the favorable tax treatment of partnership with the corporate shield from personal liability. LLC owners’ liability for debts and obligations of the LLC is limited to their financial investment, yet the members have the right to participate in management of the company like general partners.
In California, for income tax purposes, an LLC with more than one member is taxed as a partnership, and an LLC with a single individual member is taxed as a sole proprietorship. LLC may instead to choose to be taxed as a corporation by filing an election on a Form 8832 with the IRS. California taxes the LLC and its owners in the same manner the IRS does, in addition to the $800 minimum annual tax for the privilege of doing business in the state. An LLC, whether California or foreign, may not render professional services.
Pros:
- Easier and faster to form than a corporation.
- Generally, no personal liability.
- No double taxation.
One of the least burdensome corporate filing requirements.
Cons:
- More complicated to form than other forms of partnerships and sole proprietorships.
- Ownership may be harder to transfer since the LLCs do not issue stock.

SERIES LIMITED LIABILITY COMPANY (SERIES LLLC)

Series LLC is one of the newest corporate forms for master LLCs that have subsidiaries that operate as independent LLCs, each being protected from liability for the actions of other LLCs. Series LLC cannot be formed in California, but a Series LLC formed in another state may register with the California Secretary of State and conduct business in California. Both Delaware and Nevada permit formation of Series LLCs.
Pros:
Each unit may be managed independently of others.
Each unit has own assets and liabilities.
Each unit is protected from liability for the wrongdoings of other units.
- The owners enjoy personal liability protection.
Each unit may be in the same business as a master LLC or conduct its own type of business.
- Units may be formed and dissolved by simple amendments to the Operating Agreement, without filing with the state. Therefore, reduced legal, accounting and administrative fees that would otherwise be incurred by multiple unconnected LLCs.
Cons:
- Each unit must maintain separate records.
- Since Series LLC is a new entity, its tax status is unsettled and case law underdeveloped in some states. The IRS has not stated whether each unit to be taxed as a separate entity.


PROFESSIONAL CORPORATION (PC)

PCs are organized by licensed professionals, such as accountants, lawyers and doctors. In California, a PC pay taxes on its net income, either at a rate of a corporation or an S Corp., with a minimum annual $800 franchise tax. PC must pay the estimated tax in four installments.
 Pro:
- Owners are not liable for malpractice of other owners. However, each owner is personally liable for own malpractice.
Con:
- Many states require significant capitalization or insurance policies.

 
 

NON-PROFIT

Non-profit must be formed for a charitable, educational, religious, literary and similar public interest purposes. A non-profit can be registered on two levels: state and federal. When you hear “501(c)(3),” that refers to the section of the federal tax code and, thus, a federal level of registration. A federal level of registration is what you need in order to be eligible for federal tax exemptions and to attract donors by being able to tell them that their contributions will be tax deductible.
State level registration is a relatively quick, straightforward process, and usually only requires a simple filing of the articles of incorporation, stating the purpose of the organization, with the Secretary of State. Federal 501(c)(3) level registration requires filing a more complicated Form 1023, and takes longer to approve. In order to be eligible for federal tax exemptions, a nonprofit must first be registered at the state level. In California, most charities and non-profits must apply for and receive a letter of acknowledgment in order to receive a tax-exempt status. Small non-profits with ordinary gross receipts of less than $25,000 must electronically file an annual informational notice with the Secretary of State.
Pros:
-  Tax exemptions.
-  Donations to 501(c)(3) are tax-deductible.
- Eligibility for grants.
-  Directors are shielded from personal liability.
Cons:
May not be eligible to engage in certain business activities.
- Ongoing filing and reporting requirements.


B CORPORATION

“B” stands for “benefit,” as in “public benefit.” B Corps may harness the power of business and pursue public interest purposes at the same time. In discharging their duties, B Corp directors are not required by law to only pursue shareholder profit maximization; they may consider various socially important purposes and interests of stakeholders other than B Corp’s shareholders.
Pros:
May simultaneously pursue business and socially important purposes.
- Directors are shielded from personal liability.
Cons:
- A new and unknown to the public at large corporate form.
Only available in a handful of states.

Potential for abuse, if directors try to hide own business incompetence and try to justify losses with the pretense of pursuing social interests rather than profit.