LEGAL ENTITIES FOR
CONDUCTING BUSINESS
JOHN S. HERBRAND, Esq.
ONE CHASE SQUARE
SUITE 1900
ROCHESTER, NEW YORK 14604
TEL: 585.295.1562
FAX: 585.325.6287
jsh@herbrandlaw.com
The attached outline is a brief overview of certain business entities. In furnishing this outline, the author is
providing information, not legal advice. Before choosing a business entity, you should seek advice from
your attorney, accountant and other professionals.
© 2004 John S. Herbrand, Esq.
BUSINESS ENTITIES
1.
2.
SOLE PROPRIETORSHIP
PARTNERSHIP


3.
CORPORATION


4.
GENERAL
LIMITED
“C” corporation
“S” corporation
LIMITED LIABILITY COMPANY (LLC)
© 2004 John S. Herbrand, Esq.
FACTORS IN CHOOSING FORM
OF BUSINESS ENTITY
1.
2.
3.
4.
5.
6.
7.
8.
Liability of owners
Number of owners
Taxation of entity and owners
Cost of formation of entity
Cost of maintenance of entity
Management and control of entity
Financing of company
Exit strategy



Sale of business
Retirement
Estate issues
© 2004 John S. Herbrand, Esq.
SOLE PROPRIETORSHIP
Single individual owning and operating a business
ADVANTAGES:

SIMPLE AND INEXPENSIVE TO FORM AND MAINTAIN

PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES:

UNLIMITED PERSONAL LIABILITY

TERMINATION AT DEATH

DIFFICULT TO TRANSFER INTEREST
HOW TO START:

OBTAIN ANY REQUIRED LICENSES

FILE CERTIFICATE OF ASSUMED NAME IF NOT OPERATING UNDER OWN NAME

FILE SS-4 WITH IRS FOR E.I.N. IF YOU WILL HAVE EMPLOYEES

OBTAIN BUSINESS INSURANCES DESIRED
© 2004 John S. Herbrand, Esq.
GENERAL PARTNERSHIP
A partnership is an association of two or more persons to carry on as co-owners a
business for profit
ADVANTAGES:



FEW STATUTORY FORMALITIES
INEXPENSIVE TO MAINTAIN
PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES:







WRITTEN AGREEMENT NOT NECESSARY
ALL PARTNERS HAVE EQUAL VOICE AND ARE AGENTS OF THE PARTNERSHIP
DIFFICULT TO TRANSFER INTEREST
TERMINATION UPON DEATH OR WITHDRAWAL OF
PARTNER UNLESS OTHERWISE PROVIDED
IN PARTNERSHIP AGREEMENT
UNLIMITED LIABILITY FOR ALL PARTNERS
HOW TO START:





ENTER INTO PARTNERSHIP AGREEMENT (NOT REQUIRED BUT STRONGLY ADVISED)
FILE SS-4 WITH IRS FOR E.I.N.
OBTAIN ANY REQUIRED LICENSES
MUST FILE CERTIFICATE OF ASSUMED NAME
OBTAIN BUSINESS INSURANCES DESIRED
BEWARE of “CONSTRUCTIVE” PARTNERSHIPS!
© 2004 John S. Herbrand, Esq.
LIMITED PARTNERSHIP
A limited partnership is a partnership formed by two or more persons under the provisions of the New York
State Partnership Law, having as members one or more general partners and one or more limited partners.
ADVANTAGES:




FEW STATUTORY FORMALITIES
INEXPENSIVE TO MAINTAIN
PROFIT AND LOSSES PASS DIRECTLY TO OWNER
LIMITED LIABILITY FOR LIMITED PARTNERS
DISADVANTAGES:










UNLIMITED LIABILITY FOR GENERAL PARTNERS
LIMITED PARTNERS CANNOT TAKE PART IN
MANAGEMENT OF BUSINESS
EXPENSIVE TO FORM
DIFFICULT TO TRANSFER INTEREST
TERMINATION UPON DEATH OR WITHDRAWAL OF
PARTNER UNLESS OTHERWISE PROVIDED
IN PARTNERSHIP AGREEMENT
UNLIMITED LIABILITY FOR ALL
GENERAL PARTNERS
HOW TO START:









ENTER INTO LIMITED PARTNERSHIP AGREEMENT
FILE CERTIFICATE OF LIMITED PARTNERSHIP
PUBLISH NOTICE OF FORMATION
CERTIFICATE OF ASSUMED NAME NOT REQUIRED UNLESS OPERATING UNDER DIFFERENT NAME
FILE SS-4 WITH IRS FOR E.I.N.
ESTABLISH SEPARATE BANKING AND
ACCOUNTING
OBTAIN ANY REQUIRED LICENSES
OBTAIN BUSINESS INSURANCES DESIRED
© 2004 John S. Herbrand, Esq.
“C” CORPORATIONS
A statutory legal entity which exists as a legal person separate and distinct from
its shareholders
ADVANTAGES:



ENTITY SEPARATE AND DISTINCT FROM ITS SHAREHOLDERS
PERPETUAL EXISTENCE
LIMITED LIABILITY FOR SHAREHOLDERS



EXCEPTIONS: PERSONAL GUARANTEES; 10 LARGEST SHAREHOLDERS LIABLE FOR UNPAID WAGES; RESPONSIBLE OFFICERS
CAN BE LIABLE FOR UNPAID EMPLOYMENT AND SALES TAXES
DIVISIBILITY AND TRANSFERABILITY OF INTERESTS
FORMAL AND FAMILIAR STRUCTURE FOR BUSINESS OPERATIONS
DISADVANTAGES:





CORPORATE AND INDIVIDUAL LEVEL TAXES
EXPENSIVE TO FORM AND MAINTAIN
STATUTORY REQUIREMENTS
MUST HONOR FORMALITIES
ANNUAL STATE FRANCHISE TAX - $100 MINIMUM
HOW TO START:










FILE CERTIFICATE OF INCORPORATION
OBTAIN CORPORATE “KIT”
DRAFT AND ADOPT BY-LAWS
ISSUE SHARES
HOLD SHAREHOLDERS MEETING AND ELECT BOARD OF DIRECTORS
HOLD DIRECTORS MEETING AND ELECT OFFICERS
FILE SS-4 WITH IRS FOR E.I.N.
ESTABLISH SEPARATE BANKING AND ACCOUNTING
OBTAIN ANY REQUIRED LICENSES
OBTAIN BUSINESS INSURANCES DESIRED
© 2004 John S. Herbrand, Esq.
“S” CORPORATIONS
A statutory legal entity which exists as a legal person separate and
distinct from its shareholders
ADVANTAGES:
 SAME ADVANTAGES AS FOR “C” CORPORATIONS
 INDIVIDUAL LEVEL TAXES ONLY
 PROFIT AND LOSSES PASS DIRECTLY TO OWNER
DISADVANTAGES:




SAME DISADVANTAGES AS FOR “C” CORPORATIONS
RESTRICTIONS ON TYPE AND NUMBER OF SHAREHOLDERS
ONLY ONE CLASS OF SHAREHOLDER
CANNOT HAVE ANOTHER CORPORATION AS SHAREHOLDER
HOW TO START:
 SAME AS FOR “C” CORPORATIONS
 FILE FORM 2553 WITH IRS
© 2004 John S. Herbrand, Esq.
LIMITED LIABILITY COMPANIES
An unincorporated statutory legal entity which exists as a legal person
separate and distinct from its members
ADVANTAGES:





LIMITED LIABILITY FOR ALL MEMBER,INCLUDING MANAGERS
PROFIT AND LOSSES PASS DIRECTLY TO OWNER IF SO ELECTED
MULTIPLE CLASSES OF MEMBERSHIP PERMITTED
NO RESTRICTIONS ON TYPES OR NUMBER OF MEMBERS
PERPETUAL EXISTENCE UNLESS OTHERWISE AGREED
DISADVANTAGES:



EXPENSIVE TO FORM AND MAINTAIN
NO EXTENSIVE BODY OF CASE LAW
ANNUAL ASSESSMENT IN LIEU OF FRANCHISE TAX; MINIMUM $100
HOW TO START:










FILE ARTICLES OF ORGANIZATION
PUBLISH ARTICLES OF ORGANIZATION
ENTER INTO OPERATING AGREEMENT
OBTAIN LLC “KIT”
FILE SS-4 WITH IRS FOR E.I.N.
FILE FORM 8832 WITH IRS
ESTABLISH SEPARATE BANKING AND
ACCOUNTING
OBTAIN ANY REQUIRED LICENSES
OBTAIN BUSINESS INSURANCES DESIRED
© 2004 John S. Herbrand, Esq.
ALTERNATIVE TO STARTING A BUSINESS
BUY A BUSINESS!
ADVANTAGES:


PROVEN TRACK RECORD
EXISTING CUSTOMER BASE
DISADVANTAGES:


MORE COSTLY
POTENTIAL ASSUMPTION OF UNKNOWN RISKS
© 2004 John S. Herbrand, Esq.
OTHER CONSIDERATIONS

DOING BUSINESS IN OTHER STATES

TRADE/SERVICE MARKS

EMPLOYEE ISSUES
© 2004 John S. Herbrand, Esq.