Legal structures

This table describes forms of business organization with some of their advantages and disadvantages.

Sole Proprietorship Partnership/ Registered Limited Liability Limited Liability Company  S corporation C corporation
Legal liability Unlimited Unlimited for general partnership, limited for RLLP Limited, same as RLLP or corporation Limited Limited
Continuity of the entity Limited to life of proprietor Limited, unless provided for in partnership contract Dissolve date Perpetual Life Perpetual Life
Acquisition of capital Limited to only what the proprietor can secure Generally limited to what partners collectively can raise Generally limited to what members collectively can raise Maximum of 100 stockholders, but
capital generally not raised by selling stock
Unlimited number of stockholders,
but capital generally not raised by selling stock
Transfer of interest Easy because all assets owned by
individual proprietor
Right to distributions easy to transfer; interest in assets and right to management cannot be transferred without consent of other partners Economic rights are transferable, management rights transferable with consent of other members Stock easy to transfer unless restricted
by agreement, by articles of incorporation or by being statutory
close corporation
Stock easy to transfer unless restricted
by agreement, by articles of incorporation or by being statutory
close corporation
Management All management decisions by proprietor Usually all general partners will be actively involved in management activities Usually managed by members, but can have separate managers with duties as outlined by the operating agreement Managed by directors, who are elected by shareholders unless statutory close corporation has chosen to eliminate directors Managed by directors, who are elected by shareholders unless statutory close corporation has chosen to eliminate directors
Taxation of income and expenses All income and expenses reported
on proprietor’s individual tax return
Divided among partners in accordance with investment or partnership agreement and reported on partners
individual returns
Divided among members in accordance with investment or operating agreement and reported on members
individual returns
Passed directly through to the
shareholders according to the amount of stock held. Generally
no income tax paid by corporation
Taxed separately at the corporate
level, again at the shareholder level if distributed as a dividend
Liquidation of entity At the discretion of the proprietor,
treated as sale of individual assets
Required upon withdrawal of a partner unless partnership agreement permits business continuation Same as partnership Normally a two-thirds vote of shareholders
is required
Normally a two-thirds vote of shareholders
is required
Major advantages Independence, flexibility, minimum
of legal requirements
Additional management input and operational responsibilities shared, additional capital and
equity available, flexibility, shared overhead means increased profits, limited liability with RLLP
Same as partnership plus limited liability without having to file annual document, can be treated
as any business form for income tax purposes
Limited liability, profits taxed
once, direct pass through of income and expenses to shareholder
Limited liability, can offer fringe
benefits to owners and deduct them for income tax purposes
Major disadvantages Unlimited liability, limited life,
limited management ability, limited investment potential
Unlimited liability unless RLLP, annual renewal filing to keep RLLP, limited life, relations among partners can cause problems, changes of partners or partnership agreement may be difficult Relations among members can cause problems, changes of members or operating agreement may be difficult Not every corporation can qualify, cannot deduct fringe benefits for owners or their families, relations among shareholders or directors can cause problems Difficult to get assets out or
to sell business without double tax, relations among shareholders
or directors can cause problems