Business Basics Resource Guide

By Milt Wright and Anita Lee Wright
Milt Wright & Associates

Different Types of Business Structure

Chartacteristics	Sole Proprietorship	General Partnership	Limited Liability Company	S-Corporation	Corporation
Formation	No permission required	Agreement of Parties involved. No permission required	File with state for permission	File with state for permission	File with state for permission
Duration	Dependent on sole proprietership	Dissolved by death of partner or bankruptcy	typically limited to a fixed amount of time	Perpetual	Perpetual
Liability	Sole prprietor has unlimited liability	Partners have unlimited liability	Members not typically liable for the debts of the LLC	Shareholders are typically not personnaly liable for the debts of the corporation	Shareholders are typically not personnaly liable for the debts of the corporation
Simplicity of Operaton	Relatively few legal requirements	Relatively few legal requirements	Some formal requirements but less formal than corporations	Formality of a board of directors, officers, annual meetings and annual reporting	Formality of a board of directors, officers, annual meetings and annual reporting
Management	Full control of Management and operations	Typically each partner has an equal voice unless otherwise arranged	Members have operating agreement that outlines management	The corporation is managed by the board of directors who are elected by the shareholders	The corporation is managed by the board of directors who are elected by the shareholders
Taxation	No taxable entity. Sole proprietor pay all taxes	Each partner pays tax on his/her share of the income and can deduct losses against other sources of income	If properly structured there is no tax at the entry level. Income/loss is passed through to the members of the LLC	No tax at entity level. Income/loss is passed through to the share hol;ders	Corporation is a taxable entity
Pass through Income/Loss	Yes	Yes	Yes	Yes	No, corporate losses can't be deducted by shareholders
Double Taxation	No	No	No	No	Yes
Cost of Creation	None	None	Filling fee with the state	Filling fee with the state	Filling fee with the state
Raising Capital	Difficult unless individual puts in money	Contributions from partners or an addition of more partners	Possible to sell interests. Subject to operating agreement restrictions	Sell shares of stock to raise capitol	Sell shares of stock to raise capitol
Transferability of Interest	No	No	Possibly	Yes, subject to consent	Shares of stock in a corporation are easily transferable

Double Taxation: Corporations are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Thus, to the extent that earnings are distributed to shareholders as dividends, there is a double tax on earnings at the corporate and shareholder level. S corporations and LLCs are pass-through entities which are not subject to the double tax.

Pass-Through Taxation: The income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is "passed through" the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns. S corporations and LLCs are both pass-through tax entities.

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