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General
Partnership
A General Partnership is created when two
or more persons intend to carry on business for
profit. The formal filing of organizational documents
is not required. A General Partnership is taxed
as a pass-through entity; therefore, tax is paid
only by the individual partners (not the entity).
However, the partners in a General Partnership
are individually responsible for the debts of
the partnership. No minimum capital contribution
is required to form a partnership. What is commonly
referred to as a "joint venture" is in fact a
partnership. Partners can be individuals or business
entities. The term "partner" is often casually
used in the business world, but use of the term
"partner" can create the impression that a partnership
exists where there is in fact no partnership,
thus inadvertently creating personal liability.
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Limited
Partnership
A
Limited Partnership can be used to limit
the liability of its limited partners and does
require a formal filing for formation. A Limited
Partnership requires at least one general partner,
allowing the other partners to be limited partners.
Limited partners are individually liable only
for their investment amount and not for the debts
of the partnership; however, limited partners
usually are not allowed to participate in the
management operations of the partnership. General
partners can manage the partnership business but
are individually liable for both their investment
amount and the debts of the partnership. Another
business entity (including a Corporation or another
Partnership or a Limited Liability Company) can
be a general or limited partner. No minimum capital
contribution is required.
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Limited
Liability Partnership and Limited Liability Limited
Partnership
In
most states, partnerships can elect to be a Limited
Liability Partnership ("LLP") and Limited
Partnerships can elect to be a Limited Liability
Limited Partnership ("LLLP"). Partners in
an LLP and general partners in an LLLP may participate
in the management of the partnership, but remain
liable for only their individual debts and not
the debts of the partnership or other partners.
In order to form an LLP or an LLLP, a formal filing
must be made with the Secretary of State, and
the partnership must represent to the world that
it is a limited liability entity. The LLP and
the LLLP are most often utilized by professionals
in law or accounting to insulate partners from
professional liability for the acts of other partners.
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Limited
Liability Company
The Limited Liability Company ("LLC") is
an advantageous business form because it is treated
as a pass-through entity for taxation, but the
members are liable only for the amount they have
invested in the company, just as is the case with
a Corporation. Members of an LLC can be either
individuals or business entities. An LLC may be
managed either by the members or by non-member
managers. No minimum capital contribution is required
to form an LLC. The advantage of an LLC is that
the members receive the same protection from personal
liability as shareholders in a Corporation. An
LLC is not subject to some of the disadvantages
of corporate tax laws, which may result in "double
taxation". An LLC is taxed under partnership tax
laws as a pass-through entity. There are no restrictions
on who is eligible to be an owner / member of
an LLC, as is the case with "S Corporations,"
and there are no restrictions on the ability of
LLC's to own subsidiaries.
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Corporation
A Corporation is a business entity used
when the business entity will have large earnings
or the business entity has many investors and
all investors want to guarantee ease of transferability.
A Corporation may be required for other non-tax
reasons such as the need to comply with certain
immigration provisions. "Publicly traded companies"
or "public companies" are Corporations which have
registered a stock or debt offering with the U.S.
Securities and Exchange Commission (SEC). Shareholders
in a Corporation are individually liable only
for the amount of their investment. No minimum
capital investment is required. As a general rule,
a Corporation is taxed as a "C Corporation" which
means the Corporation pays its own income taxes,
or the Corporation can, if eligible, make an election
with the Internal Revenue Service to be taxed
as an "S Corporation" and therefore be taxed
as a pass-through entity.
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C
Corporation
A Corporation is called a C Corporation
if it is taxed under sub-chapter C of the United
States Internal Revenue Code. A C Corporation
is taxed on its taxable income at graduated rates.
A Corporation's taxable income equals its gross
income minus the deductions allowed by the Internal
Revenue Code. Certain distributions from a C Corporation
to its shareholders can be taxed again, thus leading
to a problem of "double taxation" on income.
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S
Corporation
An eligible Corporation may elect to be treated
as a small business corporation, commonly known
as an S Corporation, under sub-chapter S of the
Internal Revenue Code. Generally, an S Corporation
is not taxed as a business entity. Instead, all
income, deductions, and credits of the Corporation
are passed through to the shareholders. Therefore,
the shareholders are taxed via their personal
returns
on corporate income. Only certain Corporations
may elect to be an S Corporation. In order to
qualify for an S Corporation election, the Corporation
must meet the following requirements:
-
Be formed as a United States Corporation;
- Not
have more than 75 shareholders;
- Not
have a shareholder who is a Corporation
or a Partnership;
- Not
have a shareholder who is a non resident
alien; and
- Have
only one class of stock.
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There
are also restrictions on the ability of an S Corporation
to have subsidiaries. Given the above restrictions,
it is usually possible to avoid these restrictions
and have all the tax benefits of an S Corporation
by instead forming a Limited Liability Company.
Other considerations may also affect the choice
of business entity. For example, only Corporations
may adopt Incentive Stock Option plans.
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