Choosing the right legal entity for conducting business requires the consideration of several factors. The following table has basic information on the different types of legal entities. Be sure to consult your LB Tax & Business Advisors representative to determine the best legal structure for your business.
| Control | Liability | Taxes | Administration | |
| Sole Proprietorship |
Sole Proprietor has total control of the business operations and complete share of profits | All of Sole Proprietor’s personal and business assets are at risk | Taxes reported on Sole Proprietor’s tax forms. Must pay self-employment taxes | No administrative requirements other than obtaining business license and registering trade name |
| General Partnership |
Management and profits shared between partners per the terms of the Partnership Agreement | General Partners are generally liable for obligations of General Partnership and damages incurred by other General Partners | “Pass-Through” Entity. Each general partner is taxed directly upon his/her share of profits. | No formal administrative requirements other than obtaining proper licenses and permits |
| Limited Partnership |
General and Limited partners share in the control and profits of the partnership per the terms of the Partnership Agreement | Limited partners: not personally obligated for liabilities of partnership
General partners: same as partners in a General Partnership |
Pass-Through Entity. Each partner is taxed directly upon his/her share of profits | Registration requirements similar to Corporations, but no burdensome record-keeping or tax filing requirements |
| Corporation | Shareholders: ownership rights & elect directors
Directors: govern general affairs & appoint officers Officers: manage business operations |
Neither Officers, Directors, or Shareholders are liable for debts incurred by the Corporation committed in conducting the Corporation’s business | “Double-Taxation” unless “S” Corporation, which is a “Pass-Through” | Formal incorporation process and annual registration with Secretary of State. Comprehensive record-keeping and tax filing requirements. Must file form 2553 with IRS to be considered a S-Corp |
| Limited Liability Company |
Members share profits per Operating Agreement which specifies management procedures | Generally, Members risk only their investment in the LLC | May be taxed as Sole Proprietorship, Partnership or Corporation depending upon the election filed with the IRS | Similar to corporation’s requirements with regard to formation and operation |
