Business Structure Chart LLC vs Inc vs corp vs LP vs General Partnership vs Limited Partnership

Business Entity Comparison Chart – Legal Characteristics



   

General Partnership

 

Limited Partnership

 

C Corp

 

S Corp

 

LLC

Owners of business

General partners General and limited partners Shareholders Same as for C corporation Members

Personal liability for business debts

General partners are held personally liable General partner(s) are the only ones personally liable None for shareholders Same as for C corporation Members do not have any personal liability

Restrictions on nature of business

Any lawful business may be conducted Same as for general partnership Formation of banking, insurance, and other special businesses prohibited in some states Same as for C corporation—however, if converted from C to S corporation, then excessive passive income (such as from rents, royalties, interest, etc.) can jeopardize tax status Same as for C corporation; some states prohibit performance of professional services

Restrictions on number of owners

Minimum of two general partners Minimum of one general partner and one limited partner One-person corporations permitted in most states allow one-person corporations; some states require two individuals to serve as officers Same as for C corporation, but with a maximum of 100 shareholders One member allowed (every state)

Management decision-making

General partners General partner(s) only (not the limited partners) Board of Directors Same as for C corporation As a rule, members; for a manager-managed LLC, can be managers instead

Parties authorized by law to obligate business

General partner (any) General partner (any; not the limited partners) Directors and Officers Same as for C corporation As a rule, any member; if a manager-managed LLC, can be managers

Effect of death or separation of an owner

Automatic dissolution unless partnership agreement states otherwise Same as for general partnership No effect unless corporation is solely owned Same as for C corporation Dissolution unless remaining members votes to continue business (in a small number of states)

Limitations on transfer of ownership interests

Consent of all general partners usually required by partnership agreement Same as for general partnership Transfer of stock may be limited due to securities laws or restrictions placed in articles of incorporation or bylaws Same as for C corporation—but transfers are limited to persons and entities qualifying as S corporation shareholders Unanimous consent of non-transferring members possibly required by state law or by operating agreement

Extent of organizational paperwork and ongoing legal formalities

Minimal, although partnership agreement is recommended Filing is required for start-up is required; partnership agreement is recommended Filing for start is required; bylaws are recommended; annual meetings are required Same as for C corporation Filing is required for start-up; operation agreement is recommended; under normal circumstances, meetings are not required

Funding source for start-up

General partners General and limited partners Initial shareholders (some states prohibit purchases of shares with a promise to perform services or to contribute cash in the future) Same as for C corporation—but it is not permitted to issue different classes of stock with different financial provisions Members (as a rule, they may invest with a promise to perform services or to contribute cash in the future)

Usual method for business to obtain needed capital

General partners make capital contributions; banks issue business loans backed by partnership and personal assets Limited partners provide investment capital; banks issue loans backed by general partners’ personal assets Flexible; outside investors permitted to buy various classes of shares; bank loans backed by shareholders’ personal assets (if corporation has insufficient credit history); permitted to go public (IPO) if substantial cash infusion is needed Generally same as for C corporation—but no foreign, partnership, or corporate shareholders permitted; number of shareholders must be limited to 100; different classes of stock to investors not permitted, except for shares having different voting rights Members make capital contributions from members; banks issue loans backed by members; personal assets (if LLC has insufficient credit history)

Ease of conversion to another business form

Change to limited partnership, LLC, or corporation permitted; legal paperwork involved Change to corporation or LLC permitted; legal paperwork involved Change to S corporation permitted by filing simple tax election; change to LLC can involve tax costs and increased legal complexity Generally same as for C corporation—it is possible to terminate S tax status to become C corporation, but then S status cannot be elected again for five years Change permitted to general or limited partnership, or to corporation; legal paperwork involved

Do federal and state securities laws apply to establishment or sale of ownership interests?

No (generally) Yes. Issuance or sale of limited partnership interests must qualify for securities laws exemption; otherwise, registration with federal (SEC) and state authorities is required Yes. Issuance or transfer of stock subject to state and federal securities laws, otherwise, it must qualify for exemptions under the exemptions provided by these securities laws Same as for C corporation No (probably), if all members are active in business

Which type of owners prefer each form for doing business?

Joint owners who do not have any concerns about personal liability for business debts Joint owners who desire partnership tax treatment, along with some non-managing investors; general partners must be willing to assume personal liability for business debts Owners who want limited liability along with the ability to divide income between themselves and a separately taxed business Owners who want limited liability, along with application of individual tax rates to business income; must be willing to meet initial and ongoing S corporation requirements Generally, owners who want limited liability along with pass-through taxation; particularly beneficial for smaller, privately held businesses

Taxation of business profits

Individual tax rates of general partners—unless business opts for corporate treatment Individual tax rates of general and limited partners—unless business opts for corporate tax treatment Divided and taxed at corporate rates and at the shareholders’ individual tax rates Individual tax rates of shareholders Individual tax rates of members

Tax-deductible fringe benefits available to owners working in business

IRA and Keogh plans can be set up by general partners and other employees Same as for general partnership Employee-shareholders can have tax-deductible fringe benefits; employees’ medical expenses can be reimbursed; tax-free term life insurance can be provided; stock equity plans can be established for employees Same as for general partnership; however, but employee-shareholders owning 2% or more of stock are restricted from receiving deductible corporate fringe benefits; equity-sharing plans generally not available Owners receive tax benefits associated with sole proprietorship (one-member LLCs) or partnership (multi-member LLCs)

Automatic tax status

Yes Yes, upon filing certificate of limited partnership with the corporate filing office in the respective state Yes, upon filing Articles of Incorporation with the corporate filing office in the respective state No; requirement must be met, and tax election form filed with IRS (and sometimes corresponding state authority as well); revoked or terminated tax status cannot be chosen again for five years Yes, one-member LLC treated as sole proprietorship; multi-member LLC treated as partnership

Payment of taxes due when business is formed?

Generally, setting up is tax free; individual income taxes may be due if a general partner contributes services as capital contribution Usually same as for general partner Generally not taxable if IRC Section 351 requirements are met Same as for C corporation Generally, setting up is tax free; individual income taxes may be due if a member contributes services as capital contribution

Deductible of business losses

Partners are permitted to use losses to deduct other income on individual tax returns if the partners are “at risk” for loss or debt and subject to active-passive loss rules Same as for general partnership, but limited partners are permitted to deduct only “nonrecourse debts” (for which general partners are not specifically liable) Corporation is permitted to deduct business losses (shareholders may not deduct losses) Shareholders may deduct their respective shares of corporate losses on their individual tax returns, but must comply with passive loss limitation; normally, shareholders do not receive the tax benefit of entity-level debt Follows sole proprietorship or partnership rules, depending on tax status of LLC

Tax level at time business is sold

Personal tax level of individual general partners Personal tax levels of individual general and limited partners Two levels: shareholders and corporation may both be taxed on sale of business Normally taxed at personal tax levels of individual shareholders; however, corporate-level tax is sometimes due, if S corporation was formerly a C corp. Follows sole proprietorship or partnership rules, depending on tax status of LLC