Characteristics of Different Types of Corporations

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Various Forms of Business Organizations

Before starting a new business, several decisions such as its legal structure must be made first. Five basic entity types exist in which to structure a business. These types consist of sole proprietorships, partnerships, limited liability companies (LLC), C corporations, and S corporations. When determining the type of structure to use, comparison of different factors such as liability to the owners, taxation, and management controls must be conducted.

Sole Proprietorships

The sole proprietorship has one owner that is completely liable for the actions of the company but has total control over all decisions. The profit or loss of the business is reported and taxed on the owner’s individual tax return.

Partnerships

A partnership has two or more owners who share control and management decisions of the company. Profit or loss is split between the owners based on a predetermined percentage rate, usually determined by investment or activity in the company and reported on each individual’s income tax report.

Limited Liability Companies (LLC)

A limited liability company combines the attributes of a partnership with the limits on liability of a corporation. The profits and losses of the company still pass to the owners as in a partnership, but the losses can only offset other income up to the amount the individual invested. Formal action is not required to form a LLC, but articles of organization are filed with the proper state department. Management is still controlled by the owners.

C Corporation

A C corporation is the basic form of corporation in the United States. The amount of shares of stock a C corporation can issue is unlimited and traded freely. The C corporation files its own tax return instead of showing profit and loss on the owner’s personal returns. The dividends issued to the stockholders are however, subject to individual taxes also, causing a double taxation effect. In addition, the C Corporation pays employment taxes on active shareholders salaries by differentiating between passive and active income.

S Corporation

The S corporation is limited to the amount of shares of stock it can issue to 100 United States shareholders.

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