SP, GP, LLC, LLP, C Corp, S Corp:
Decoding the Alphabet Soup of Incorporation
A Special Thank You to:
Dr. David M. Yousem, M.D., M.B.A. Professor, Department of
Radiology Vice Chairman of Program Development Director of
Neuroradiology Johns Hopkins Hospital
for allowing the use of his material/content in this presentation
Dr. Yousem’s online lecture series can be viewed at:
http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?catalogId=7e
18b7d5-9c63-487e-aaf1-77a86f83b011
Dr. Yousem’s project was funded through an RSNA Educational Grant
Why should I care?
• Protection of personal assets
o Limiting liability
• Possible taxation benefits
• Selling stock to raise funds
• Durability
o Corporation continues indefinitely
• Transfer of ownership
• Corporation has its own credit and credit rating
Types of Businesses
•
•
•
•
Sole proprietorship
General Partnership
Limited Liability Partnership, LLP
Corporation
o
o
C Corporation
S Corporation
• Limited Liability Company, LLC
o Professional Limited Liability Company, PLLC
• Pass-through entity
Sole Proprietorship
•
•
•
•
Single owner
No legal distinction between the person and the business
All assets owned by the person
All profits pass to the owner – taxes paid on owners personal tax
return
• Unlimited personal liability
• No durability
o Example: After the death of the owner the business ceases to
exist
General Partnership
• Association of 2 or more persons
• Generally created by partnership agreement
o In the US a partnership is legally recognized as a separate entity
from the persons making it up
• No protection from personal liability
o Owners are personally liable for all debts, taxes, and liabilities of
the business
• Profits shared between partners as specified in the partnership
agreement – taxes are paid on each partners tax return
• Decision making powers are specified in the partnership agreement
• No durability
o Technically a partnership dissolves after death of a member
Limited Partnership, LP
• One or more General Partners
o Run the business, have decision making authority
o Personally liable
for all debts, taxes, malpractice
• One or more Limited Partners
o Limited partners generally do not get involved with day to day
decisions
o No personal liability, only liable up to their investment
 Example: Jane (general partner) owns a building and Joe (limited
partner) invests money with Jane. Jane shares the
buildings profits with Joe. If the building burns down Joe would
only lose his investment and would not be liable for additional
damages.
Limited Liability Partnership, LLP
• All partners have limited liability
• You are not personally liable for debts and taxes of the business
• You are not responsible for your partners negligence or malpractice
• You are responsible for your own negligence or malpractice
• Different from a corporation by the fact that all partners retain decision
making capacity
• Typically used by lawyers, accountants and architects
C-Corporation
• Separate legal entity, created to maximize profit and limit liability
• Profits are double taxed
• The corporation is taxed on its income
• The dividends it pays to its shareholders are also taxed
• Limited corporate liability
• Shareholders only lose their investment if the corporation fails
• Personal liability
• Malpractice is not covered by corporate liability
• Small portions of the company owned by shareholders (i.e. stock)
• No limit to number of shareholders
• The may different types of stock (preferred stock)
• Additional information
• IRS Publication 542
S-Corporation
• Separate legal entity from its shareholders
• Annual state tax/fee for existence
• Not double taxed
• Corporate income is divided among the shareholders
• Individual shareholders must declare income on their individual taxes
• Limited liability same as a C-Corporation
• Different shareholder structure from a C-Corporation
• Only one type of share (no common or preferred stock)
• Limited to 100 shareholders or less
• Shareholders must be U.S. Citizens or residents
• Profits are allocated to shareholders based on their investment in the
business
• Additional information
• IRS Publication 542
How is a corporation formed
• C-Corporation
•
•
•
•
•
•
Name is chosen
Initial board of directors appointed
File paperwork
Create bylaws
First board of directors meeting
Issue stock
• S-Corporation
• Same as for C-Corporation, but must meet special requirements as outlined
in the previous slide
• Conversion from a C-Corporation to an S-Corporation must be by
unanimous shareholder vote
• If an S-Corporation fails to fulfill the special requirements of an SCorporation it will automatically revert to a C-Corp and be taxed as such
Limited Liability Company, LLC
• Blend of aspects of a partnership (or sole proprietorship if there is a
single owner) and a corporation
• A LLC is not considered a corporation
• Limited liability
• Only members’ investments are at risk
• Taxation by default is similar to a sole proprietorship or general
partnership
• A LLC can elect to be taxed as a C-Corp or S-Corp
• Some states allow formation of PLLC (professional limited liability
company) for professions that require a license to operate (such as
doctors or lawyers)
A few words about limited liability
• Financial liability for the companies debts is limited to a fixed sum
• Most commonly the sum of the person’s investments, you can’t lose more
money than you have invested
• If a plaintiff sues a corporation they are suing the corporation and not an
individual
• You are still liable for your own actions
• Limited liability does not protect you from malpractice
• It does protect you from your partners malpractice (in the case of a LP or
LLP) or other shareholders malpractice (in the case of a corporation)
Pass-Through Entity
• Aims to avoid double taxation
• The entity files tax returns, but does not actually pay taxes
• Only the investors are taxed
• Form K-I is issued to each investor reporting their individual
earnings/ losses
In a nutshell
• Limited liability
• LP, LLP, LLC, and incorporation all provide their partners and shareholders
with limited liability protection
• Sole proprietorships and general partnerships do not provide this protection
• In any of these business types you are still liable for your own
actions/malpractice
• Taxation
• C-Corporations are “double taxed”
• They pay tax on corporate income
• Their shareholders pay tax on the dividends
• The remainder of the business types are “pass through” which means the
profits are taxed based on the individual’s tax return
In a nutshell (continued)
• Decision making capacity
• In a partnership all partners are part of decision making process
• In a corporation the board of directors holds the decision making power
• Paperwork
• C-corporations and S-corporations require the most paperwork to initially set
up the business and to keep it going
• i.e. usually requires an accountant and perhaps a lawyer
• LPs and LLPs
• Less paperwork
• Technically sole proprietorships and general partnerships do not require the
filing of any paperwork with the federal or state government
In a nutshell (continued)
• Additional information
• Partnerships need to be made up of at least two people
• S-corporations
• No more than 100 shareholders, all US citizens or residents
• Only 1 type of stock
• C-corporations
• Unlimited shareholders, multiple classes of stock
References
•
•
•
“Business of Radiology”. Lecture series by Dr. David Yousem.
http://tinyurl.com/yousem-biz. Accessed December 2010
“LLCs, corporations, partnerships, etc.” www.nolo.com Accessed
December 2010
“Publication 542" (PDF). Department of the Treasury, Internal Revenue
Service. February 2006. http://www.irs.gov/pub/irs-pdf/p542.pdf.
Retrieved December 2010.