Business Forms: An Overview

One owner. Simplest business form. No formal requirements to create or operate this form. Owner has unlimited, personal liability for all of the business's debts. Owner personally hires all employees, and thus the owner has unlimited, personal liability for the acts of employees. For these reasons, this form should usually be avoided.

Not a separate taxpaying entity: Income is reported on the owner's personal tax return, which may result in lower taxes, and does not require the filing of a separate tax return.

Must have two or more owners. No formal requirements to create or operate this form. All owners have unlimited, personal liability for all of the businesses debts. All owners personally hire all employees, and thus all of the owners have unlimited, personal liability for the acts of employees. In addition, each owner has unlimited, personal liability for the acts of all of the other owners. Exposure to liability is so great in this form that, simply put, it should not be used.

Not a separate taxpaying entity: Income is reported on the owners' personal tax returns, which may result in lower taxes, and the business files only an information return with the IRS. Relatively simple business form to create and operate-basically a sole proprietorship with two or more owners.

Must have two or more owners. Formally created under state law. At least one owner must be a general partner who has unlimited, personal liability in all of the same ways as in a general partnership. At least one owner must be a limited partner (frequently all of the other owners will be limited partners) who has limited liability, similar to owners of a corporation or limited liability company (LLC). However, unlike those owners, limited partners are prohibited from participating in the management of the business. This form has been used mostly for tax planning purposes (tax shelters) and estate planning purposes (transfer of discounted ownership shares to children). In addition, an LP can register to become an LLLP, which gives the general partner limited liability.

May have one or more owners. Formally created under state law. All of the owners have limited liability for the business's debts. Usually more costly than LLC to create and maintain. Subject to many formal statutory rules ("corporate formalities") regarding officers and directors, meeting and recordkeeping requirements. A regular corporation, termed a "C corporation," is a separate taxpaying entity, which may result in higher taxes and requires the filing of a separate tax return.

When the corporation elects to be treated as a "conduit" for tax purposes, so that its income and loss flow to the owners, it is termed a "subchapter S" corporation. Note that this is merely a federal income tax election made by filing a form with the IRS. The corporation is formed in the normal manner under state law, and the subchapter S election has no other effect on the character of the corporation, except for the different tax scheme.

In a small group of states, the corporation may be formed as a statutory close corporation, which operates more like a partnership or LLC. This option can offer significant advantages over a conventional corporation.

Newer business form. May have one or more owners. Formally created under state law. All of the owners have limited liability for the business's debts. Usually less costly than a corporation to create and maintain. Relaxed, less burdensome rules governing operation compared to a corporation.

Not a separate taxpaying entity: Income is reported on the owner's personal tax returns, which may result in lower taxes, and does not require the filing of a separate tax return when there is only one owner. The LLC combines into one form the best elements from the corporation (limited liability for all of the owners) and the general partnership (absence of formalities, low costs, tax benefits).

Finally, in many states, the business interests of the owners of an LLC are protected from the claims of the owners' personal creditors. This advantage is not enjoyed in the corporation or the Limited Liability Partnership (LLP)

Requires two or more owners. Similar to an LLC, but with important differences. Formally created under state law. All of the owners have limited liability for the business's debts, but in many states, the limited liability offers less protection than what is afforded to the owners of an LLC or a corporation.

Generally, anyone can form an LLP. However, California and New York limit the use of the LLP to professionals. Finally, some states use the term "Registered" Limited Liability Partnership (RLLP) because the LLP is really a general partnership that has "registered" in the LLP form to achieve some version of limited liability for all of the owners of the business.

Formally created under state law, the options include professional corporations (PCs), LLCs, professional limited liability companies (PLLCs) and LLPs. Each are explained in detail later.