CAMLAW: Complementary and Alternative Medicine Law Blog

Which corporate entity is best for your business?

Should you form a corporation (S or C), LLC, general partnership, limited partnership, or some other entity ... or do you need a professional corporation?

Our attorneys have experience advising on corporate entity formation and can give you guidance in making critical business decisions, whether you need help with general business legal issues or in health care relating to complementary and alternative medical therapies or otherwise.

There are also many online resources about incorporation and the pros and cons of different structures.

Here is just one we came across researching other aspects of law. This one is from Georgia's Department of Corporations.

Thanks Georgia, you're always on my mind.

Ready to scroll? Here goes:

WHICH LEGAL ENTITY
IS RIGHT FOR
YOUR BUSINESS:
YOUNGER LAWYERS SECTION
CORPORATE, BANKING AND IN-HOUSE
COUNSEL COMMITTEE
STATE BAR OF GEORGIA
This brochure has been prepared by the Corporate, Banking and In-House Counsel
Committee of the Younger Lawyers Section of the State Bar of Georgia. Its purpose is to
inform the public and not to advise regarding specific legal issues. Consult your attorney
for legal advice pertinent to your particular situation. 2/00
SPONSORED BY
© 2000 State Bar of Georgia
SOLE PROPRIETORSHIP,
GENERAL PARTNERSHIP,
LIMITED PARTNERSHIP,
CORPORATION OR
LIMITED LIABILITY COMPANY?
of Atlanta
A limited partnership is composed of general partners and limited partners. The defining
characteristic of a limited partnership is that limited partners can invest capital
in a business of the limited partnership and take a share in the profits without
becoming personally liable for partnership debts and obligations.
Control
Unlike limited partnerships in many other states, in Georgia limited partners may participate
in controlling the business without becoming personally liable for the limited
partnership's obligations. Thus, Georgia is a particularly attractive state for the
formation of limited partnerships in which limited partners wish to have an active
role in the management and control of limited partnership affairs.
The limited partnership agreement may govern which partners or classes of partners
control the entity. As with general partnerships, Georgia law will govern the handling
of matters not addressed in the partnership agreement. General partners have equal
rights to participate in the management of the limited partnership and have the
power to bind the limited partnership in transactions with third parties. A limited
partner can assign his or her interest in the profits of the limited partnership and
the assignee may become a limited partner if the limited partnership agreement so
provides or if all other partners consent.
Liability
As mentioned above, limited partners are not personally obligated for the liabilities
of the limited partnership by reason of being a limited partner and do not become
so by participating in the management or control of the business. A general partner
has unlimited liability, similar to a general partner in a general partnership (except
as otherwise provided in the Georgia Revised Uniform Limited Partnership Act). To
avoid such unlimited liability, many limited partnerships have a corporation as their
general partner. Alternatively, the entity may limit the liability of the general partner
by electing LLLP status through a filing with the Secretary of State. Each general
partner owes the utmost duty to the limited partnership and to each of the other
general and limited partners.
Taxation
The limited partnership pays no entity-level income tax or net worth tax, and each
partner is taxed directly upon his or her respective distributive share of the limited
partnership's profits (which may or may not be the same as their ownership percentage),
unless the limited partnership elects to be taxable as a corporation.
Administration
Limited partnerships in Georgia are required to register with the Secretary of State,
but are governed by a Limited Partnership Agreement among the parties, and generally
do not have to contend with burdensome requirements for filings, publications,
or record maintenance.
LIMITED PARTNERSHIP
The Limited Liability Company (LLC) is a business entity organized under state law
that offers limited liability like a corporation along with the possibility of "passthrough"
taxation, unless it elects corporate treatment for federal tax purposes.
Therefore, an LLC is a cross between a partnership and a corporation.
An LLC is owned by one or more interest holders called "members" and any member
can exercise management rights. However, an LLC also allows the members to
manage the entity or to designate specific managers who may or may not be members,
to manage the entity as is done in many corporations. Like a corporation, an
LLC has the advantage of "perpetual" existence — its business operations can continue
despite the death of someone who owns a business interest. Ownership interests
are transferred easily from one member to another.
Liability
As its name implies, the LLC provides limited liability for its owners similar to shareholders
in a corporation. The LLC owner risks only their investment in the business.
Other personal assets are not a risk, unless the owner has personally guaranteed the
debt.
Taxes
Under new IRS regulations, the LLC with more than one member will be taxed as a
partnership unless it elects to be taxed as a corporation and the LLC with only one
member will be disregarded for tax purposes. If it is treated as a
partnership, the LLC's earnings will be apportioned to its owners and taxed at their
personal tax rates, similar to the tax treatment of a limited partnership. However, it
is possible to elect corporate tax treatment, whereby it will be taxed as a corporation.
Administration
The process of creating an LLC closely resembles the process of creating a corporation.
Georgia law requires that "Articles of Organization" be filed with the Secretary
of State. An LLC has an "operating agreement" which, like the agreement of
partnership or LP, determines the conduct of the business, including the rights and
powers of its members, managers, and employees and which generally allows the
members to structure the company's affairs as they see fit, rather than as a statute
requires.
LIMITED LIABILITY COMPANY
A corporation is a legal entity that is separate from its owners, the shareholders. It
is formed by filing certain documents with the Secretary of State and taking other
actions required by the Code. A corporation may have perpetual existence, meaning
that it continues to exist regardless of the status of the individual shareholders.
Control
A corporation is composed of three different "players": the shareholders, directors and
officers. It is critical to understand that these players have different responsibilities,
obligations and authorities. The shareholders own the corporation and elect the directors.
The directors govern the general affairs of the corporation and appoint officers
who conduct the day to day business of the corporation. It is typical in smaller corporations
for an individual to hold two or three "player" positions. In fact, one person
can be the sole shareholder, director and officer.
Liability
Limited liability is the most important reason to incorporate. The debts incurred by
the corporation cannot generally be collected from the officers, directors or shareholders
of the corporation. This allows one to protect his or her personal assets from
the debts and obligations of the corporation. However, oftentimes shareholders are
called upon to guaranty payment of the debts of the corporation. It is important to
keep personal and business dealings separate from the corporation's business in order
to ensure that one cannot be personally liable for obligations of the corporation.
Taxation
"For profit" corporations (other than S corporations, which are discussed below) are
subject to what is know as "double taxation." This means that the corporation pays
tax on the income earned by the corporation and its shareholders pay tax on dividends
received from the corporation. An S corporation is not subject to double taxation.
Rather, for tax purposes, it is known as a "pass-through" entity (as is a partnership).
The term "pass-through" means that there is no tax on the corporation, but
that the income and losses of the S corporation are passed through to the shareholders
in proportion to their ownership interests whether or not they record a distribution.
A corporation can be an S corporation merely by meeting certain eligibility requirements
and making a special election with the IRS. These eligibility requirements
include having no more than 75 shareholders who must be individuals or certain
trusts or estates. Further, the shareholders may not be non-resident aliens and the S
corporation can only have one class of stock. From a legal standpoint, an S corporation
is no different than any other corporation. It is organized and operated like other
corporations and has all of the characteristics of a corporation described above. From
a tax perspective, however, they are very different. A tax professional should be consulted
to determine whether the shareholders will benefit from causing a corporation
to make an S election.
CORPORATION Administrative
The corporate form of doing business does have some disadvantages. Sine the corporation
is a separate entity, it must file tax returns and pay taxes on its income. A
corporation must maintain certain records in order to ensure that its corporate status
is maintained. This means additional accounting and legal costs associated with
using the corporate form of doing business.

 

The sole proprietorship is the simplest, least regulated and most common form of
business organization. Legally and for tax purposes the individual owner is the business.
The liabilities and profits are personal to the owner.
Control
The sole proprietor has total control of the business. The problem with total control
is that if the owner dies, the business ceases to exist. The assets and liabilities of the
sole proprietor will pass to his or her estate, but often the expertise and knowledge
of the business usually die with the sole proprietor. A competent estate planning
lawyer can assist the sole proprietor in arranging for the business to be transferred
to a family member or some other person upon the death of the sole proprietor.
Liability
In a sole proprietorship, all of the personal and business assets of the sole proprietor
are at risk. One obtaining a legal judgment for damages against a sole proprietor
can secure a lien against his or her personal assets and can foreclose on the
lien. This unlimited liability is the greatest disadvantage of this type of business form.
Different types of insurance coverage are available to lessen the perils of having one’s
personal assets at risk.
Taxes
Taxes are reported on the sole proprietor's personal income tax forms. The sole proprietorship
is the simplest form of business for tax purposes. As the business grows,
the sole proprietor may wish to change to another business organization if it would
result in significantly lower taxes. Sole proprietors should also contact their local, state
and federal tax authorities regarding the collection of sales and other taxes.
Administrative Obligations
The sole proprietor should maintain adequate records to successfully run the business
and for tax purposes. However, there are no administrative requirements, such as maintaining
minutes of meetings or passing resolutions, with which he or she must comply.
Usually, the only requirement is to obtain and pay the fee for a local business
license. Georgia also requires that a sole proprietor operating under a trade name
register in the county where it will transact a majority of its business. This allows
creditors and others the opportunity to learn the identity of the actual owner, since
it will be the owner who is personally liable for the debts and obligations of the
business.
SOLE PROPRIETORSHIP
The legal form of doing business as a general partnership comes into existence when
there is an association of two or more persons, the general partners, who carry on
a business for profit as co-owners. The existence of a profit motive is essential. No
filing or other registration with the Secretary of State is required.
Control
Each general partner has a right to participate in partnership management, as well
as a right to share in the profits of the partnership. The issue of control can be
addressed with a partnership agreement. This written agreement is not legally
required, but it encourages specificity. An interest in a general partnership cannot be
transferred without the consent of the other general partners (unless the transferred
interest is only a right to profits). Death or withdrawal of any general partner dissolves
the general partnership.
Liability
Each general partner has joint and several unlimited personal liability for obligations
of the general partnership. This means that each general partner has the potential
of being personally indebted for each obligation of the general partnership. One general
partner's actions can make another general partner personally liable on a contract.
Similarly, the actions or torts of one general partner arising in the ordinary
course of the general partnership's business can result in another general partner
being personally liable on a contract or in a lawsuit. Further, a general partner owes
the utmost duty to the general partnership and to each of the other general partners.
In order to limit the liability of a general partner, such entities often elect to
be treated as a LLP by filing a certificate with the Secretary of State.
Taxation
Partnerships are "pass-through" entities for tax purposes; the general partnership itself
does not pay taxes. Each general partner takes into account his or her share of general
partnership income, losses, deductions and credits in determining his or her personal
tax liability. A partnership agreement may provide for the allocation of these
tax benefits and burdens.
Administration
General partnerships do not require any formal organizational meeting or state filing
requirement to come into existence. The only obligations required are those germane
to all business entities such as a business license, tradename registration, proper permits
and the like, unless a decision is made to elect LLP status.
GENERAL PARTNERSHIP
SOLE
PROPRIETORSHIP
CONTROL LIABILITY TAXES ADMINISTRATION
GENERAL
PARTNERSHIP
LIMITED
PARTNERSHIP
CORPORATION
LIMITED
LIABILITY
COMPANY
Sole Proprietor has total
control of business
operations and complete
share of profits
All of Sole Proprietor's
personal and business
assets are at risk
Taxes reported on Sole
Proprietor's tax forms
No administrative
requirements other than
obtaining business license
and registering trade name
Management and profits
shared between partners
per the terms of the
Partnership Agreement
General Partners are
generally liable for
obligations of General
Partnership and tort
damages incurred by other
General Partners
"Pass-Through" Entity.
Each general partner is
taxed directly upon his/her
share of profits
No formal administrative
requirements other than
obtaining proper licenses
and permits.
General and Limited
partners share in the
control and profits of the
partnership per the terms of
the Partnership Agreement
Limited partners: not
personally obligated for
liabilities of partnership
General partners: same as
partners in a General
Partnership
Pass-Through Entity.
Each partner is taxed
directly upon his/her share
of profits
Registration requirements
similar to Corporations,
but no burdensome
record-keeping or tax
filing requirements
Shareholders: ownership
rights & elect directors
Directors: govern general
affairs & appoint officers
Officers: manage business
operations
Neither Officers, Directors
or Shareholders are liable
for debts incurred by the
Corporation or torts
committed in conducting
the Corporation's business
"Double-Taxation" unless
"S" Corporation, which is a
"Pass-Through" Entity akin
to a General Partnership
Formal incorporation
process and annual
registration with Secretary
of State. Comprehensive
record-keeping and tax
filing requirements
Members share profits per
Operating Agreement
which specifies management
procedures
Generally, Members risk
only their investment in
the LLC
May be taxed as
Partnership or Corporation,
depending upon the
election filed with the IRS
Similar to Corporation's
requirements with regard
to formation and operation
Selecting the appropriate legal entity for conducting one's business requires consideration of many factors. This brochure sets forth some of the basic characteristics of five
different types of legal entities. It is unlikely that you will be able to select the entity most appropriate for your business by only reading this brochure. Consult private counsel to
select the legal entity most appropriate for your business.

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Michael H. Cohen, Esq.; 468 North Camden Dr. | Beverly Hills, California 90210 | 310-844-3173