Basic Formation type of Business Entities

There are three basic types of business entity. The corporation, the limited liability company and the sole proprietorship. Each of these has its own qualities and sub-types for specific situations. An exhaustive review of each sub-type is beyond the scope of this document to explore but it is worth noting the high-points of each.

Corporationcorporations

C-Corp: A C-Corp is the type of corporation you think of when any big corporate name is mentioned. Non-Profit organizations normally must be a C-Corp type of organization.

Advantages:

  • Liability is limited to investment in the company via stock purchases
  • Funds can be raised by issuing more stock

Disadvantages:

  • Control of the company can be lost when the principles no longer hold a majority of the stock
  • There are a large number of regulatory requirements that must be met and with that comes added cost to do business

S-Corp: An S-Corp uses the liability limits and funding mechanics of a C-Corp and the simplicity of operation of a Sole Proprietorship.

Advantages:

  • Limited liability for the investors and owners
  • Simpler accounting and record keeping than a C Corp
  • Operates with the simplicity of a Sole Proprietorship
  • Similar protections of a C Corp

Disadvantages:

  • Limited number of shareholders

llcLimited Liability

Limited Liability Company (LLC) and Limited Liability Partnership (LLP) are only slightly different. The LLC is a relatively new concept and has been adopted in all 50 States and the codes are fairly uniform. Some States even allow a single person to form and LLC. Some business types may not be an LLC but may be and LLP. These are typically business that operated under regulations that are found in financial institutions.

Advantages:

  • Limits liability of the principles to their investment
  • Operates with the simplicity of a Sole Proprietorship
  • Is relatively easy compared to a corporation to start and operate from a Registration, Tax and Accounting perspective

Disadvantages:

  • Is more limited in its ability to raise capital
  • Keeps income tax liability as a Sole Proprietorship would

sole-propritorshipSole Proprietorship

A sole proprietorship or partnership, is the easiest form of a company and has the least number of requirements to start. It normally only takes filing a fictitious name statement and registration with a local government agency.

Advantages:

  • Easy to start
  • Low start-up costs
  • Few regulations and restrictions

Disadvantages:

  • Personal liability for the actions of the company
  • Some companies will not do business with a DBA