Choice of Legal Entity
Selecting a form of legal entity for a business can be
a complex decision which is usually based on the type of
business, the source of financing(present and future), the
type of ownership, and the expected profitability of the
business, among many other considerations. The following
information should be used merely to familiarize yourself
with the various choices and should not be used to select
a form of entity without further consultation with counsel.
C-Corporation – This is the standard type of entity most
widely used in the United States, and is used primarily
by publicly held businesses and most large companies. The
net income of a C-Corporation is taxed at the corporate
level and losses are carried on the corporation’s books
to be applied against future net income, with certain limitations.
Shareholders in a C-Corporation are generally protected
from any liabilities in excess of their investment. C-Corporations
can have an unlimited number of shareholders and can have
many classes of stock. Distributions to C-Corporation shareholders
are not deductible to the corporation, but are generally
taxable to the shareholder. C-Corporations can also select
a year-end other than December 31st.
S-Corporation – This type of entity is used primarily by
small, closely-held businesses. The net income of an S-Corporation
is allocated to all shareholders based upon their ownership
percentages and is taxed at the shareholder level (there
are certain exceptions for state taxes). Likewise, the net
losses are also allocated to shareholders and may be deducted
at the individual level, with certain exceptions. Shareholders
in an S-Corporation are generally protected from any liabilities
in excess of their investment. S-Corporation may have no
more than 75 shareholders, and those shareholders cannot
be other corporations or non-resident aliens, among other
limitations. S-Corporations can have only one class of stock
and can only have a calendar year-end (December 31st).
Partnership or Joint Venture – Partnerships may be either
limited partnerships or general partnerships. Partners in
a limited partnership are protected from liability in excess
of their investment in the entity, whereas partners in a
general partnership (and general partners in a limited partnership)
have unlimited liability. Partnerships have no stock, and
partners are taxed on their respective shares of net income
or losses at the individual level. Partnerships have calendar
year-ends and pay no Federal or State income taxes.
Limited Liability Company (“LLC”) – LLC’s may be treated
either as S-Corporations or Partnerships. When treated as
a corporation, the same general rules that apply to S-Corporations
apply. When treated as a partnership, the same general rules
that apply to partnerships prevail, however, all LLC members
are generally protected from liability. Unlike corporations
or partnerships, LLC’s generally pay fees (up to $7,785
in the State of California) based upon gross receipts.
