Presenter:
Christopher M. Pacheco, Esq.
Shareholder
Lastrapes, Spangler & Pacheco, P.A.
Types of Business Organizations:
Legal Requirements/Regulations
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What is involved in setting up each type of
organization, do I need legal assistance or can I do it
myself?
Who will own and control the business?
What is the personal liability associated with each
business type?
What is the duration and how easily can each business
type be transferred?
What are the potential tax consequences and
applications?
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One person is owner/manager, assets owned by owner
All profits and losses to the owner
Owner personally liable
No regulatory filings to establish the entity
Single tax return, with owners federal/state return, tax paid by owner
on personal return
Don’t forget:
 Maintain separate personal/business bank accounts and complete
accurate business records
 If hiring employees, don’t mistake simple for informal, have written
handbook, job descriptions and duties
Pros
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Simple (no formation
requirement)
Low to no entity start up costs
Your own boss
No double taxation, passes
through owner
Cons
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Unlimited personal liability
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Two or more owners, assets owned by partnership
Each partner participates in management decisions
Each partner liable jointly and severely
No regulatory filings to establish the partnership
Two tax returns, partnership and personal, tax paid by individual
partners on personal return
Don’t forget:
 Have a written partnership agreement although it may not legally be
required
 Keep business and partners bank accounts and complete accurate
business records
Pros
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Simple (no formation
requirement)
Low to no entity start up costs
Can establish the duties and
obligations of each partner via a
partnership agreement
No double taxation, partnership
return is required for information
only
Cons
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Unlimited joint and several
personal liability
◦ you are responsible for what your
partner does on behalf of the
partnership even if you do not
agree
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Dissolves if partner dies or leaves
the partnership (unless
partnership agreement otherwise
provides)
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Two or more owners, assets owned by partnership
At least one general partner and one or more
limited partners
Management in the hands of the general partner
Profits shared in relation to investment or
agreement
General partner has full liability, limited partner is
generally shielded
A regulatory filing is required to establish
partnership
Two tax returns, partnership and personal, tax paid
by individual partners on personal return
Pros
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Limited liability for limited
partners
Written partnership agreement
outlines the terms and conditions
of the partnership relationship
Partnership survives as long as
the partners agree it will
No double taxation, partnership
return is for information only
Cons
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Must be formally formed with
state
◦ Although simple it does create an
expense
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Must ensure limited partnership
follows regulatory requirements
to ensure the limited partners are
shielded from personal liability
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One or more owners (shareholders)
Management by a board of directors elected by
Shareholders, officers elected by the board
Profits share by dividends
Shareholders not personally liable (unless
guaranteed)
A regulatory filing is required to establish
corporation
A tax return is required at the corporate level, the
corporation pays the taxes
Pros
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Shareholders are shielded from
personal liability
Written bylaws governing the
corporation specifically forth how
the corporation will be operated
Perpetuity
Cons
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Must be formally formed with
state
All formal requirements such as
annual meetings and/or annual
reporting must be diligently
followed to maintain the shield of
personal liability for the
shareholders
Double taxation – shareholders
pay taxes on dividends and
corporation pays taxes
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One or more owners (shareholders)
Management by a board of directors elected by
Shareholders, officers elected by the board
Shareholders not personally liable (unless
guaranteed)
A regulatory filing is required to establish
corporation
An election is made not to be taxed as a corporation,
taxes are paid by the shareholders in proportion to
their ownership share of income or gain regardless
of any cash distribution (such as dividends)
Pros
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Shareholders are shielded from
personal liability
Written bylaws governing the
corporation specifically forth how the
corporation will be operated
Perpetuity
No double taxation – the corporation
does not pay separate taxes
Cons
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Must meet IRS criteria
Limits on types of shareholders
Must be formally formed with state
All regulatory requirements such as
annual meetings and/or annual
reporting must be diligently followed
to maintain the shield of personal
liability for the shareholders
Shareholders may be required to pay
tax on the corporate earnings even if
no dividends are paid
IRS Subchapter S criteria:
1.
2.
3.
4.
5.
Corporation has < 75 shareholders
Corporation has one class of stock
All shareholders must be U.S. residents
All shareholders must be individuals
Corporation operates on a calendar year basis
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Provides limited liability of members (owners)
One or more owners
Management structures vary – officers are optional
and formalities of a corporation are not required
Members generally not personally liable (unless
guaranteed)
Taxes may be filed as a corporation, and taxes paid
by the corporation, or like a partnership and paid
by the partners, and partners may be classified as
active or passive and taxed differently
Pros
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Members are shielded from
personal liability
Fewer formalities than
corporation
Operating Agreement controls
governing of LLC, unlike
corporation its optional to have
officers, etc.
Usually no double taxation – can
elect to have pass through to
Members (taxed as partnership)
Cons
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Must be formally formed with
state
Although minimal there are
regulatory requirements to
maintain the shield of personal
liability for the members
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Proprietorship
General Partnership
Limited Partnership
C-Corporation
S-Corporation
Limited Liability Company
Questions?