South Bend Business Law Firm | Tuesley Hall Konopa, LLP | Mishawaka, Elkhart Indiana & Michigan

Business and Entity Comparisons

Sole Proprietorship

Sole proprietor makes decisions and can act immediately
Proprietor is responsible for and recognizes all profits or losses
Proprietor is liable on all liabilities of the business
Existence and flexibility has no restrictions
Type of ownership is individual
Assets of business transferable rather than business itself
No formal election required
Tax attributes are reflected in the individual’s return, and maintain their identity
Partners or shareholders reasonable salary not applicable
All income or loss is on owner’s return

General Partnership

Action dependent upon the agreement of partners or general partners, as defined in the partnership agreement
Except for limited partners, investment in partnership involves responsibility for management decisions
General partners individually liable on partnership liabilities Limited partners liable only for unpaid capital contributions
Partnership is contractual arrangement, within which partners can do in business what individuals can, subject to any partnership agreement and applicable laws
More than one class of partner permitted
Consent of other partners often required if partnership interest is to be transferred, depending upon any partnership agreement New partnership may be created
No limitation for qualified owners
A partnership agreement should be drafted
Conduit - no tax to partnership
Partner’s reasonable salary can be deducted by partnership or treated as an allocation of partnership profits
Partnership profit and loss agreement (may have “special allocations” of income and deductions if they reflect economic reality)

Limited Partnership

Action based on authority of general partners, limited partners must be passive
Except for limited partners, investment in partnership involves responsibility for management decisions
General partners individually liable on partnership liabilities. Limited partners liable only for unpaid capital contributions
Partnership is contractual arrangement, within which partners can do in business what individuals can, subject to partnership agreement and applicable laws
Can be general partner or limited partner More than one class of partner permitted
Consent of other partners often required if partnership interest is to be transferred, depending upon partnership agreement New partnership may be created
No limitation for qualified owners
Certificate of limited partnership must be filed under state law, partnership agreement is required
Conduit – no tax to partnership
Partner’s reasonable salary can be deducted by partnership or treated as an allocation of partnership profits
Partnership profit and loss agreement (may have “special allocations” of income and deductions if they reflect economic reality)

Regular (C) Corporation

Action based on authority of board of directors
Shareholder may receive dividends without sharing in responsibility for management
Shareholder’s liability limited to capital contributions
Corporation is a creature of the state functioning with powers granted explicitly or necessarily implied, subject to judicial constructions and decisions
More than one class of stock permitted
Ready transfer of ownership through the use of stock certificates; restrictions may be imposed by shareholder’s agreement
No limitation for qualified owners
Must incorporate under state law
Taxed at the corporate level
Shareholders’ reasonable salary deductible by the corporation and taxable to the shareholder employee
No income allocated to stockholders

Professional Corporation

Action based on authority of board of directors
Shareholder may receive dividends without sharing in responsibility for management
Shareholder’s liability limited to capital contributions
Corporation is a creature of the state functioning with powers granted explicitly or necessarily implied, subject to judicial constructions and decisions
More than one class of stock permitted
Shares can be transferred only to qualified shareholders Ready transfer of ownership through the use of stock certificates; restrictions may be imposed by shareholder’s agreement
Only designated types of professionals can be shareholders
Taxed at the corporate level unless S-Corporation
Shareholders’ reasonable salary deductible by the corporation and taxable to the shareholder employee
No income allocated to stockholders unless S-Corporation

S Corporation

Same as Regular Corporation, except unanimous consent is required to elect S corporation status, more than 50% of shareholders needed to revoke S status can be revoked by failure to meet requirements
Shareholders entitled to allocable shares of income and loss items without sharing in responsibility for management
Shareholder’s liability limited to capital contributions
Corporation is a creature of the state functioning with powers granted explicitly or necessarily implied, subject to judicial constructions and decisions
Only one class of stock permitted Non-voting stock is permitted, and not considered to be a second class of stock
Shares can be transferred only to certain types of shareholders (see below) No consent is needed by a new shareholder for S election
Individual citizens, resident aliens, estates and certain trusts may be shareholders Number of shareholders limited to 100 Certain tax-exempt organizations may be members
Must incorporate under state law and make formal
S-election
Conduit - could be passive income Potential corporate built-in gains tax
Shareholder reasonable salary deductible by the corporation and taxable to the shareholder-employee
Pro-rata portion of income or loss and separately stated items, based on per share, per day allocation

Limited Liability Company

Action dependent upon the agreement of members or managers or as otherwise provided in Operating Agreement
Member-managed or manager-managed or as otherwise provided in Operating Agreement
Member’s liability limited to capital contributions
LLC is a hybrid of partnership and corporation features, with great flexibility and unlimited duration
More than one class of member and membership interest is permitted
Consent of other members often required if LLC interest is to be transferred, depending upon Operating Agreement
No limitation for qualified owners
Must meet state LLC requirements
Depends on “Check the Box” election Default is Conduit - no tax to LLC
Depends on nature of business and nature of member’s involvement Can be self-employment tax issues
LLC Operating Agreement (may have “special allocations” of income and deductions if they reflect economic reality)