If you are just getting started and have not yet formed your business, take a look at the different entities described below and let Attorney Sweeney help you determine which business form is right for you.
There are advantages and limitations for every type of business entity. Attorney Sweeney can not only take you through the step by step process of creating these entities, but is also able to help pick which business formation is best for you. (Click here to see all posts about business formation and here to see posts about buying and selling businesses)
A sole proprietorship is the simplest structure for doing business, and involves the business being owned by a single person without creating a separate business entity. Because there is no separate business entity, there is no separation between the owner and the business for tax and liability purposes. While there are certain tax advantages to the sole proprietorship, such as the ability to defer some losses forward and backward, sole proprietorships have unlimited liability for all actions and debts of the business entity.
class=”text”>General Partnership- A general partnership is very much like a sole proprietorship, only there are two or more persons who share liability and flow through taxation in direct proportion to their interest in the partnership. General partnerships are governed by chapter 178 of the Wisconsin statutes. While no written agreement is required to perform a partnership, it is strongly recommended.
Limited Liability Partnership (LLP)- Limited Liability Partnerships operate much in the same way as General Partnerships except that it limits each partners liability for the other partners wrongful acts. Individual partners still remain personally liable for their own negligent and wrong acts.
Limited Partnership- – In a Limited Partnership, there is at least one General Partner who still retains unlimited liability, while there can be any number of Limited Partners who function much in the same way as stock holders. They are investors in the company whose liability only extends as far as their investment. They can lose the money they invested, but nothing more. They, however, cannot generally make decisions for the company nor bind the company to any contracts or agreements.
A corporation is a business entity that is created by filing articles of incorporation with the Department of Financial Institutions (DFI). Legally speaking, it is an entity all to itself and is completely separate from its owners officers and directors.
C Corporation- Also known as a regular Corporation, the “C” refers to sub chapter C of the Internal Revenue Code. One of the advantages of a Corporation is that because it is its own entity, shareholders, officers, and directors do not have personal liability for the actions of the corporation. However, C Corporations are subject to what is known as double taxation. All profits that the Corporation earns are taxed and then any money that is paid out to the shareholders as dividends is taxed again.
S Corporation- The only real difference between a C Corporation and an S Corporation is which section of the tax code it falls under, C or S. Under section S, if all shareholders provide written consent to the election, the corporation will not double taxed. Instead, all corporate-level income will be taxed as shareholder income in proportion to shareholdings. There are certain restrictions to what types of business can organize as an S corporation, and with the advent of the Limited Liability Company described below, S Corporations are becoming less and less common.
Statutory Close Corporation- Generally less formal than C and S corporations, it can operate without a board of directors and without bylaws. If a corporation elects to be a Statutory Close Corporation it has the right of first refusal when it comes to shareholders transferring their shares to non-immediate family members. There must be 50 or fewer shareholders to be a Statutory Close Corporation. These corporations can elect to be covered by either section C or S of the Internal Revenue Code.
Service Corporation- Not a very common organization, it is for people licensed, certified, or registered in a specific field. To have a valid Service Corporation, it is required that all shareholders be licensed in that particular field. Unlike other Corporations, shareholders still retain personal liability for their own wrongful and negligent acts and possibly those they supervise. A Limited Liability Partnership (LLP) is generally a much better option as the tax and liability ramifications are almost identical and an LLP allows for non licensed professionals in the companies field to be partners.
Personal Holding Corporation- It is only valid when its only assets are other businesses. It cannot be actively engaged in any trade or business and is taxed under section C of the Internal Revenue Code.
Public Corporation- A C corporations that is traded on a stock exchange. These corporations are regulated by the federal Securities and Exchange Commission (SEC) and the various state “Blue Sky” laws.
Non-stock Corporation- Generally for non-profit organizations. It is not required to have members and is governed by a board of directors and officers. It is taxed under section C of the Internal Revenue Code.
Limited Liability Company (LLC)
LLC’s are very similar to S corporations only without some of the restrictions. They are taxed in the same way as S Corporations, with flow through taxation to the members based on their percentage of ownership. An LLC is owned by its members and managed by managers. LLC’s enjoy the same immunity from personal liability for business obligations. An LLC may have an unlimited number of members including corporations, other LLC’s, partnerships, trusts, and foreign individuals. If your business is organized as an LLC you are required to make it known to those you do business with that you are an LLC or you may lose your liability shield. Due to the flexibility and ease of set up for LLC’s they are quickly becoming the most popular structure for small and mid size businesses.
*Much of the information for this page was found in the Wisconsin State Bar CLE book on “Business Organizations.”