CHOICE OF BUSINESS ENTITY (cont.)

Now let’s turn to the standard Choice of Business Entities. For our purposes we will consider five: 1. Sole Proprietorship, 2. C-Corp, 3. S-Corp, 4. Limited Liability Companies and 5. Partnerships - General and Limited in form. Holding to our objective in this first article we will discuss the meaning of these terms and seek to avoid commenting directly on the advantages, disadvantages and appropriateness of each for particular situations. In future articles we will discuss the latter issues and end this series with a final article containing a chart comparing each entity.

Sole Proprietorships.

A Sole Proprietorship (“SP”) is frequently chosen by default and the necessity to “do it now” by the owner. Basically a sole proprietorship is a business conducted and owned by an individual and is not otherwise legally organized as a legal entity. This results in title to property being held in the owner’s name. The consequence is direct and personal liability for all business debts and obligations. This also includes direct, absolute liability for all taxes – income, sales and withholding to mention the three most obvious.

Despite the disadvantages, it is by far the most frequently used form for doing business. There are some advantages such as low maintenance costs. However, in my opinion, it is a poor choice for a business having any prospect of complex, sophisticated business or financial dealings or a desire it survive the owner’s demise. We shall detail the advantages and disadvantages in a future article.

C-Corps.

The C-Corp is also known as a general business corporation and it is created in the United States under the particular state laws in which they are initially organized. The use of the term “C-Corp” is adopted from Subchapter C of the Internal Revenue Code of 1986 which covers corporate taxation. Over time the various states have adopted a similar basic structure but the corporate characteristics, duties and taxation can vary substantially depending on the particular state in which you incorporate.

Simply stated the corporate form results in a distinct legal entity that is autonomous, existing apart from its shareholders and possessing most of the powers of an individual. This means it can own and transfer property, has limited liability for its shareholders/investors, ease of selling interests (stock), continuity of interest, no pass through of income taxes and it can sue in court. Of course there are additional characteristics, advantages and disadvantages which will be discussed in future articles.

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