BUSINESS ENTITY OVERVIEW

SOLE PROPRIETORSHIPS:

• Number of Owners: one only
• Business and business owner: same entity
• Profits and losses: reported by owner
• Finances: can co-mingle with owner's finances
• Filing, incorporation fees, annual reports: not required
• Taxes: owner pays self-employment tax on all business earnings
• Personal Liability: owner has unlimited personal liability
• Fringe benefits: less favorable tax treatment than with other business forms
• Loan availability: banks wary of loaning capital

PARTNERSHIPS:

• Number of owners: partnership is automatically created when two or more people begin a business or joint venture
• Business and business owner: same entity for most purposes
• Profits and losses: reported by owners
• Taxes: owners pay self-employment tax on all business earnings
• Fringe benefits: less favorable tax treatment than with other business forms
• Loan availability: banks wary of loaning capital

General Partnerships:

• Personal Liability: owners have unlimited personal liability
• Extended Liability: owners may be liable for the actions of other owners
• Management: owners can bind, or contract on behalf of, the partnership

Limited Partnerships:

• Personal Liability: one owner is a general partner and retains complete personal liability
• Limited Liability: limited partners have limed liability
• Management: limited partners are restricted as to the amount of participation and control the have over the company and are generally financial backers who want a small amount of control and maximum protection in exchange for their investment

CORPORATIONS:

A. Generally

• Business and business owner: separate legal and tax entities
• Filing fees, incorporation fees and annual reports: required
• Limited Liability: all owners have limited liability as long as the company is properly formed, adequately capitalized, and corporate formalities are followed
• Life of business: unlimited
• Loan availability: banks more willing to loan capital
• Transferability of interests: the business may be set up so that shares or interest in the business may be easily transferred
• Corporate formalities: documents must be drafted, organization and operation is complex

B. "C" Corporations

• Number of owners: one or more
• Profits and losses: reported by the entity
• Taxes: the entity is taxed at the corporate level; the tax rate is higher than for most individuals (except for some personal service corporations)
• owners are paid salaries and may avoid paying income tax on company profits by leaving profits in the company
• owner pays state and federal unemployment tax and FICA on salary paid to him/herself
• owner does not pay self-employment tax on earnings
• income from sale of the business is heavily taxed

Fringe benefits: favorable tax treatment

Ownership options: complex ownership interests may be created through use of stock options

C. "S" Corporations

• Number of owners: one to 75 shareholders
• Profits and losses: reported by owners
• Taxes: owner should pay him/herself a reasonable salary, which is subject to all withholdings, or
• owners may be subject to self-employment tax on all business earnings
• Fringe benefits: moderate tax advantage
• Ownership options: only one class of stock is permitted
• Restrictions on ownership: owners must be individuals, estates, or certain trusts, but can not be other
• corporations

LIMITED LIABILITY COMPANIES:

• Number of owners: one or more
• Business and business owners: separate legal and tax entities
• Filing fees: required
• Annual reports: not required
• Limited Liability: all owners have limited liability if company is properly formed and adequately capitalized
• Life of Business: limited
• Profits and Losses: reported by owners
• Taxes: owner/manager must pay self-employment tax on earnings
• Loan availability: banks moderately willing to loan capital
• Transferability of interests: restrictions generally exist
• Corporate formalities: documents must be drafted, organization and operation is moderately simple
• Restrictions on ownership: any person or entity may be an owner
• Ownership options: complex ownership interests may be created through use of different types of stock

Disclaimer

This fact sheet is meant only as a general description of the current laws as of the date of the writing. They are not exhaustive and are intended to be only an overview. Many issues may appear simpler than they are, and one should always contact an attorney to obtain a complete, accurate interpretation of the law given the individual circumstances. Thompson Klausner Law Group, p.c. makes no representations as to how the law would affect a particular situation and intends only to illustrate areas of concern and give information.

©2000, Thompson Law Group, P.C.

Lisa C. Thompson, Esq.
Thompson Law Group, P.C.
2321 E. Speedway Blvd.
Tucson, Arizona 85719 - USA
www.thompsonlawgroup.com
(520) 882-5633  Fax: (520) 745-0616