Corporate and Business Law > FAQ about Business Structures

What are the basic forms of business organizations?

Sole Proprietorship, Partnership, Limited Liability Company (LLC), Limited Liability Partnership (LLP), Corporation

What is a "C" Corporation?

A general corporation is known as a "C" corporation. It may have unlimited number of stockholders. It pays corporate tax and the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to double taxation.

What is an "S" Corporation?

A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. S Corporations avoid "double taxation" because all income or loss is reported only once on the personal tax returns of the stockholders. To get S Corporation status, all stockholders of the corporation must be citizens or permanent residents of the United States. The maximum number of stockholders for an S Corporation is 75. A financial institution that is a bank, an insurance company taxed under Subchapter L, a Domestic International Sales Corporation (DISC) and certain affiliated groups of corporations are not eligible for S Corporation Status.

What is an LLC?

A Limited Liability Company, or "LLC", is an unincorporated business entity that is similar to both corporations and partnerships. Like a corporation, an LLC shields its members from personal liability for the debts and obligations of the company. Like a partnership, an LLC is typically formed by the filing of a "certificate of formation" or similar certificate with the Secretary of State and the members of LLCs typically enter into an operating agreement that establishes how the LLC is governed. LLCs may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. As compared to a Corporation, an LLC has more flexibility in management as LLC may be managed solely by its members or a management committee or officers. LLC's do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors. LLC's are available in all 50 states and Washington, D.C. An LLC may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC. Because an LLC combines the insulation from personal ability of a corporation with the tax advantages and managerial flexibility of a partnership, it may be the entity of choice for new businesses.

Why should one form an LLC and not an S Corporation?

• Any owner of the company is another business entity or a nonresident alien.

• The company will be owned by more than 75 persons.

• The company plans to issue more than one class of stock

• The owners desire to use business debt to increase their tax basis.

What is the difference between a corporation and an LLC?

LLC has more flexibility in management. LLC may be managed solely by its members or a management committee or officers. LLC's do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors. An LLC may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC. LLC is not double taxed as income is taxed at the member level only.