Business Formation FAQ

General Information and Frequently Asked Questions

Starting out your own business involves many important decisions. One of the decisions is the type of business entity format for your new business. There are several choices.

Business Organizations Types

There are several types of business organization structure.

Corporations – General Considerations

A corporation is a separate legal entity that is distinct from the owners, also known as the shareholders. The primary benefit of a corporation is that the owners are not personally liable for the debts and liabilities of the corporation. The shareholders elect the board of directors to make major business decisions and oversee the general operations of the business. The directors then appoint officers to manage the day-to-day operations of the business. Unlike, a sole proprietorship or partnership, a corporation has a continuous life. It survives the death of its owners. It can also be easily transferred to new owners. The legal documentation of a corporations such as licenses and permits are held in the name of the corporation and not the owners and thus do not have to be transferred.

C Corporation

The traditional corporation is known as a C Corporation because it is taxed under Chapter C of the Internal Revenue Code. It is subject to two levels of taxation. The corporation pays taxes, as do the shareholders on the income passed to it by the corporation.

S Corporation

An S Corporation is a corporation that qualifies to be taxed under chapter S of the Internal Revenue Code. This type of company is not taxed at the corporate level. Its shareholders, instead, are taxed on income they receive. However, to receive this tax advantage, an S Corporation has restrictions that a C Corporation does not have. To qualify as an S corporation, the shareholders must elect to have subchapter S status. They must agree, and the corporation must meet the definition of a “small business corporation.” A corporation is a small business corporation if it has fewer then 75 shareholders and must be a domestic corporation. These shareholders must be individuals, estates or certain qualifying trusts. S corporations cannot have corporations, partnerships or LLCs as shareholders. Shareholders must also be U.S. citizens and residents. The corporation must only issue one class of stock.

Non-Profit Corporation

A non-profit corporation is a corporation that is carried out for a charitable, educational, religious, literary or scientific purpose. A non-profit corporation does not pay either state or federal taxes because the government deems the corporation’s actions to be for the betterment of society.

Limited Liability Company (LLC)

An LLC owner, otherwise known as “member”, enjoys limited liability protection in that they are generally not liable for the LLC’s debts and obligations. An owner can be held liable for the company debts only if he or she guarantees the obligation or if the owner is personally negligent. LLCs do not have to comply with corporate law and generally have fewer restrictions than a corporation has. An LLC also is free from many corporate formalities that govern a traditional corporation. LLCs do not have a board of directors or officers. LLCs do not have to hold shareholder meetings or keep records of any meetings. LLCs are run by the managers. Nonetheless, the members must have a written operating agreement to govern the affairs of the LLC. Interests in LLCs are not freely transferable like stock in a corporation. LLCs do not have a perpetual life. An LLC can be dissolved at the end of a stated period or when a member disassociates, unless the other members agree to continue the business.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. No paperwork has to be filed with government to create a sole proprietorship. However, a fictitious business name certificate may have to be file with the appropriate government entity. A sole proprietorship ends upon the death of the owner and does not have liability protection from creditors of the business.


There are generally two types of partnerships, general and limited. A general partnership usually involves two or more persons to carry out the business as co-owners. With a general partnership, the partners are liable for the debts of the business, and each partner is an agent of the partnership. With a limited partnership, there is general partner that manages the affairs of the business. The limited partner has limited liability and are liable only for the partnership debts and obligations to the extent of their contribution to the partnership. A limited partnership must file a certificate of limited partnership with the government A general partner has unlimited liability. Partnerships are not treated as separate entities for tax purposes. Under Chapter K of the Internal Revenue Code, partnerships gains and losses are accounted by the partners on their individual tax returns.

Registered Limited Liability Partnerships (LLP)

LLPs are partnerships in which partners, with some exceptions, are not liable for damages caused by tortious acts or misconduct by the other partners. Professional partnerships, such as law and accounting firms, often elect to become LLPs because of the additional liability protections this structure provides, while still being able to take an active role in managing the partnership. An LLP must be registered with the government.

Professional Corporation (PC)

This is a corporation for certain licensed professionals. The professions which are required to be professional corporations include: Accountants, Acupuncturists, Architects, Chiropractors, Clinical Social Workers, Dentists, Doctors, Lawyers, Marriage, Family & Child Counselors, Nurses, Optometrists, Pharmacists, Physical Therapists, Physicians’ Assistants, Psychiatrists, Psychologists, Shorthand reporters and Speech and language pathologists. A PC will provide limited liability for general business debts but not for the professional own malpractice. A PC may not engage in any business other than its profession.

Choosing A Business Entity

Selecting a business structure involves several important factors, and two of the most important factors are liability considerations and tax consequences.

Liability Concerns

If personal liability may be an issue, you should avoid being a sole proprietor or a general partner. Neither form provides personal protection from creditors. In addition, if you have personal debt or potential for personal creditors, your business assets will not be protected from those creditors. You will then want to choose a corporate or limited liability company format.

If personal liability is not a concern, you can avoid the possibility of double taxation and corporate formalities by opting for sole proprietorship or general partnership. Legally, these are the simplest business structures to operate. Nevertheless, one should still keep their personal and business affairs separate.

Tax Issues

A consideration in any selection is how your entity will be taxed. A traditional C Corporation will be taxed twice, once at the corporate level and once when distributions are made to the owners. This is called “double taxation” and you can avoid it by selecting a “pass through” business entity. A “pass through” entity allows the owner to receive the profits of the business without being taxed at the business level. There are three types of “pass through” business structures you can chose: a limited liability company, an S Corporation, and a partnership.

It is important that you understand and consider the various forms of business entity types before staring your business. For more advice on selecting an entity format, you should call our office at 619-702-2907 for a consultation.

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