Step 7 Types of Legal Structure

Updated: Feb 27, 2019


Selecting the right type of legal structure for your new business helps maximize your chances of financial and operational success. Common types of business structures and corporations include C corporations, limited liability companies (LLC), partnerships, S corporations, and sole proprietorship's.


Sole Proprietorships/DBA


A DBA (also known as a “sole proprietorship”, “Doing Business As”, or a “Fictitious Name”) is a business that is not separate from its owner, merely a different name that the business owner operates under. This is the simplest form of business entity.

The owner is personally liable for the company and its debt;

All income is added to the owner's personal tax returns (pass-through taxation).

If there is more than 1 owner, then the business is classified as a “General Partnership”.

No state filing required to form a sole proprietorship.

PROS: Easy to maintain.

CONS: Owners are personally liable for the company and its debt ( the owner(s) could lose a house, cars, personal assets, etc.) in a lawsuit. Usually not recognized at the State level, only in your city/county. No corporate “prestige” of having the “Inc.” or “LLC” attached to your name. LLC’s have primarily replaced DBA’s as the entity of choice for even the smallest businesses.

Limited Liability Companies (LLCs)

A limited liability company is automatically taxed in the same way as a sole proprietor if there is one owner or a partnership if there are multiple owners. An LLC also can choose to be taxed as a C corporation or an S corporation. Independent legal structures separate from their owners.

Help separate your personal assets from your business debts.

No limit to the number of owners.

Not required to hold annual meetings or record minutes.

Governed by operating agreements.

PROS: Provides the liability protection of a corporation without the corporate formalities (Board meetings, Shareholder meetings, minutes, etc.) and extra levels of management (Shareholders, Directors, Officers). Taxed the same as a sole proprietorship (1 Member LLC) or partnership (2 or more Members).

CONS: Usually more expensive to form than a DBA, requires more paperwork

C Corporations

C corporations (c corps) offer unlimited growth potential through the sale of stocks. There is no limit to the number of shareholders a c corp can have. C corporation pays corporate income tax on its profits. If a C corp. pays dividends to its owners (shareholders), they report those dividends on their personal tax returns and pay tax on them. Many small businesses end up paying more taxes under this “double taxation" system.

Independent legal and tax structures separate from their owners.

Help separate your personal assets from your business debts.

Must hold annual meetings and record meeting minutes.

Corporations can be taxed in two ways.

PROS: Provides personal liability protection; conveys permanence, can reduce taxes (lower tax rate on retained profits, items like healthcare, travel, and entertainment are deductible).

CONS: More expensive to set up than a DBA; more paperwork and formality required than an LLC (holding Shareholder/Board meetings, keeping minutes and resolutions).


S Corporations

S Corporations can avoid double taxation by being taxed as an S corporation. An S corp. doesn't have to pay corporate income tax. All of its profits “pass through" to the shareholders' personal tax returns, and the shareholders pay personal income tax on them.

Independent legal and tax structures separate from their owners.

Help separate your personal assets from your business debts.

Owners report their share of profit and loss in the company on their personal tax returns.

Limits the number of shareholders, who must be U.S. citizens or residents.

Must hold annual meetings and record meeting minutes.

PROS: Prestige of the corporation without double taxation. Ideal for “1 person corporations”.

CONS: More paperwork and formality required than an LLC (holding Shareholder/Board meetings, keeping minutes and resolutions).

Partnerships

A limited partnership (LP) is much like a general partnership, but with a few significant differences.

Management of a limited partnership rests with the "general partner," who bears unlimited liability for the company's debt and obligations. A limited partnership allows for any number of "limited partners," whose liability is limited to the total amount of their investment in the company.

Partners remain personally liable for lawsuits filed against the business.

Usually, no state filing required to form a partnership.

Easy to form and operate.

Owners report their share of profit and loss in the company on their personal tax returns.

PROS: The general partner has complete management control of the limited partnership.

CONS: Limited partners are sometimes referred to as "silent partners" - in other words, they can make investments in the company but have no voting power or control over its day-to-day operations.

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