Company Formation Options
Business Organization Forms
It would be nice if forming a company didn't involve so many decisions. Unfortunately, that's not the case. However, we've created this simple primer on the options that are available to entrepreneurs when they start a business.
Ready to start an LLC or form a corporation?
When it comes to company formation, you've got choices. Here are the primary options for forming a company that you'll likely want to consider.
General Partnership. Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership. For tax purposes, partnerships enjoy single taxation. Income is reported as part of each partner's personal income.
Limited Liability Partnership. A General Partnership which elects to operate as an LLP. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership's debts and liabilities. For tax purposes, the income of an LLP is taxed in the same manner as a General Partnership.
Limited Partnership. A partnership with at least one General Partner and one Limited Partner. A limited partner's liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership. For tax purposes, the income is taxed in the same manner as a General Partnership.
Corporation. A legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys protection from the corporation's debts and liabilities. From a taxation perspective, income is taxed twice: 1) at the corporate level; and 2) at the employee level when a wage is paid or at the shareholder level when distributed as a dividend.
S-Corporation. After filing Articles of Incorporation, a Corporation may seek to obtain S Corporation status for federal income tax purposes. The income of an S Corporation is taxed only once: at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
Nonprofit Corporation. A corporation whose purpose is to engage in activities which do not provide financial profit to the benefit of its members. Such corporations must obtain nonprofit or tax exempt status from the IRS to be free from certain tax burdens.
Limited Liability Company. An LLC is a formal association which combines the advantage of a corporation's limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement. For taxes, if the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
Share this article
Additional Resources for Entrepreneurs