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Forms of Business Entities Explained (US Business Entities)

Table of Contents

Most of the Information on this Page were provided by Online Incorporation and LLC Formation.

Different Forms of Business Entities: Comparison Chart. Compare: LLC, S-Corporation and C-Corporation

Doing-Business-As (DBA)

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It is necessary to register your business name with the state if operating under a name other than your personal or legal name (the official name of the person or entity that owns the business).

Example: John Doe starts a new business called "New Market Media". In this case John needs a DBA. However , if John Doe does business as "John Doe's New Market Media ", then a DBA is not required.

DBA filing - File your DBA - Fictitious Business Name, Assumed Trade Name:
You must register the name with a government agency - sometimes the state, but usually the city or county clerk's office responsible for the location where you have an official business address (which could be your home address, if you have a home office).

You can file a DBA in more than one location (if you have multiple offices across the country), but only if you have an address in that location. You do not gain anything from it, so save your money for additional filings and spend it on something else.

It does not matter, if your Business is a sole proprietor, LLC or Corporation. A DBA is required in any case. If you form a LLC, S-Corporation or C-Corportation without your Name in the Title, the DBA Registration will usually be part of your Filing for your new Business.

Also, note that if you incorporate or form an LLC, you still need a business license. Incorporation or LLC formation does not eliminate the business license requirement.

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C-Corporations (or simply a Corporation)

The standard corporation, also called a C corporation, is a very common business structure. Corporations are separate legal entities that are owned by shareholders. Conversely, sole proprietorships and partnerships are not separate legal entities. They are considered to be the same as the owner(s). In order to form a corporation, the appropriate formation documents, usually called the articles of incorporation or a certificate of incorporation, must be filed with the state and the state filing fees be paid

The primary advantage of incorporating a business is the limited liability the corporate entity affords its shareholders. Typically, shareholders are not personally liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts owed by the corporation. In a partnership or sole proprietorship the owner�s personal assets may be used to pay debts of the business.

Other advantages of incorporating a business include:
  • Incorporating may establish credibility for a new business with potential customers, employees, vendors, and partners.
  • The ownership of a corporation is easily transferable through the sale of stock.
  • Corporations have unlimited life extending beyond the illness or death of owners.
  • Certain expenses, such as insurance, travel, and qualified retirement plans are typically tax-deductible.
  • Additional capital can be easily raised through the sale of stock (shares) in a corporation.
The main disadvantage to forming a C corporation is often considered to be the potential for double taxation. C corporations are considered separately taxable entities by the Internal Revenue Service (IRS), and taxes must be paid on the profits of the corporation. If a corporation then distributes its profits to shareholders in the form of dividends, the dividend income is also taxed as regular income to the shareholders. In this case, the corporation�s profits are taxed twice, first as income to the corporation and second as dividend income to the shareholder, creating the �double-tax.�

However, not all income a shareholder receives from a C corporation is subject to the double tax. For example, if the shareholder is also an employee of the corporation, that shareholder will most likely receive a salary payment from the corporation. As long as the salary paid to the shareholder is considered by the IRS to be reasonable (or similar to the market salary rates for that position), it is treated as a business expense and is deductible to the corporation. This helps reduce the amount of taxable income the corporation has.

In order to eliminate the possibility of double taxation, C corporations can elect to be taxed as an S corporation with the IRS. With S corporations, the profits and losses of the corporation are reported on the individual tax returns of the shareholders, and any necessary tax is paid at the individual level. This taxation method is called "pass-through" taxation, since the profit or loss of the corporation is passed through to the shareholders.
Other aspects of C corporations that can be considered disadvantages include:
  • Corporations are more expensive to form than sole proprietorships and partnerships.
  • There are more corporate formalities, such as annual paperwork, and more state and federal rules and regulations, than with sole proprietorships and general partnerships.
When evaluating whether the corporate structure is right for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.

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S-Corporations (Subchapter Corporations)

A subchapter S corporation is a standard corporation that has elected a special tax status with the Internal Revenue Service (IRS). S corporations carry the same benefits as C corporations, such protecting the shareholders� (or owners�) personal assets from the debts and liabilities of the business, unlimited life and tax deductibility of certain business expenses. The primary differences between S corporations and C corporations are the way they are taxed and also the ownership restrictions S corporations face.

When deciding which entity structure is most appropriate for their business, small business owners often view the potential double taxation of profits associated with C corporations as the primary disadvantage to forming a standard corporation. With C corporations, the profits are taxed first at the corporate level, and then taxed again at the individual level if they are distributed to shareholders in the form of dividends. Shareholders must report dividends as personal income and pay taxes on that income.

Double taxation can be eliminated by completing the S corporation election with the IRS. S corporations are taxed as pass-through taxation entities, similar to general partnerships and most limited liability companies. While the profits of an S corporation are reported at the corporate level, taxes are not paid at the corporate level. Instead, the profits are passed-through to the individual tax returns of the shareholders and are taxed at the individual rate. If the S corporation reports a loss, the amount of the loss is also passed-through and reported on tax returns of the shareholders.

Keep in mind, not all C corporations can make the S corporation election with the IRS, as the IRS has placed restrictions on S corporations. Current restrictions include:
  • Shareholders must number fewer than 75, and all shareholders must consent in writing to the S corporation election.
  • Shareholders must be individuals, estates, or certain qualified trusts.
  • Shareholders cannot be non-resident aliens.
  • S corporations can have only one class of stock(disregarding voting rights).
To be classified as an S corporation, a corporation must make a timely filing of Form 2553 with the IRS. IRS instructions indicate that the form must be completed and filed:
  1. At any time before the 16th day of the 3rd month of the tax year if filed during the tax year the election is to take effect, or
  2. At any time during the preceding tax year. An election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2 � months long is treated as timely made for that tax year.
An election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next year. For example, if a calendar tax year corporation makes the election in April 2005, it is effective for the corporation�s 2005 calendar tax year.

For questions on whether the S corporation structure is best for your particular business, it is best to seek the advice of an attorney or accountant.

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LLC - Limited Liability Company

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Limited Liability Companies

The limited liability company (LLC) is a distinct business entity that combines the corporate advantage of limited liability protection with "pass-through" taxation, the method of taxation afforded to both general partnerships and S corporations.

Like corporations, LLCs come into existence after making a filing with the appropriate state body, typically the Secretary of State, and paying the necessary state filing fees. The LLC formation documents are typically called articles of organization or a certificate of organization.

In terms of taxation, the LLC�s income is not taxed at the entity level as is that of a C corporation. While the LLC does complete a tax return, the income or loss of the LLC as shown on this return is passed through the LLC and is reported on the owners� individual tax returns. The LLC�s owners then pay taxes on the LLC�s profits at the individual tax level. LLCs can elect with the Internal Revenue Service (IRS) to be taxed like a C corporation, but this is not overly common.

Other advantages of LLCs include:
  • Members are typically not held personally responsible for the debts and liabilities of the company.
  • Forming an LLC can help establish credibility for a new business with potential customers, employees, vendors, and partners.
  • There are generally no restrictions on the number of members allowed.
  • LLCs have flexibility in structuring the management of the company.
  • LLCs do not require as much annual paperwork or have as many formalities as corporations and S corporations.
Some disadvantages of LLCs include:
  • LLCs are more expensive to form than sole proprietorships and general partnerships.
  • LLCs face more ongoing requirements, such as state annual report filings, than sole proprietorships and general partnerships.
  • Ownership is typically harder to transfer than with a corporation.
  • Because the LLC is a newer business structure, there is not as much case law to rely on for determining precedent.
Regarding the ownership of an LLC, the owners are called members. Members are analogous to shareholders in a corporation or partners in a partnership, depending on how the LLC is structured. Members will more closely resemble shareholders if the LLC utilizes a manager or managers because the members will not directly participate in the management of the LLC. If the LLC does not utilize managers, then the members will more closely resemble partners because they will have a direct say in the decision-making of the company. An LLC must specify at the time of formation whether it will be managed by members or managers.

A member�s ownership of an LLC is represented by "membership interest," just like a partner�s interest in a partnership or a shareholder�s shares of stock in a corporation.

When evaluating whether the LLC is the right business structure for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.

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Nonprofit Corporation

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Nonprofit Corporations

A nonprofit corporation is a corporation that is formed for purposes other than generating profit. Nonprofit corporations are formed pursuant to different state law than standard for-profit corporations. There are many types of nonprofits, such as churches or church associations, charities, schools, medical providers, legal aid societies, volunteer services organizations, professional associations, research institutes, museums, and in some cases sports associations.

The most common type of nonprofit is the 501(c)(3) nonprofit, which are organized under Section 501(c)(3) of the Internal Revenue Code. These nonprofits are created for some religious, charitable, educational, literary, or scientific purpose allowed by this section of the code. As mentioned above, nonprofits can be organized for other purposes. For example, Chambers of Commerce are 501(c)(6) nonprofits and cooperative hospital service organizations are 501(e) nonprofits.

The first step in creating a nonprofit corporation is filing the nonprofit articles of incorporation with the appropriate state agency, often the Secretary of State, and paying the required state filing fees. The articles of incorporation for a nonprofit must typically include detailed information regarding the business purpose so the state can ensure the proposed activities of the corporation will comply with the state�s nonprofit statutes.

Nonprofits do not automatically become tax exempt upon formation with the state. In order to become a tax-exempt nonprofit corporation, the corporation must file for both federal and state tax-exempt status. To apply for federal tax-exempt status, Form 1023 must be completed and submitted to the IRS. This is a very detailed process that can take months to complete, and often four to six months to obtain approval from the IRS. Additionally, the IRS charges a fee when Form 1023 is filed. The fee is based on the nonprofit corporation�s gross receipts in the first five years of existence. To apply for tax-exempt status at the state level, contact your state�s department of taxation for information on its process.

As with standard corporations, nonprofits must also comply with ongoing requirements imposed by the states, and ongoing formalities required of the corporate structure. Many states require nonprofits to complete annual reports or semi-annual reports and to pay a report filing fee. These reports allow the states to keep updated information on the nonprofit. Nonprofits are also required to hold and properly document annual meetings of directors and members. Similar to for-profit corporations, nonprofits offer limited liability to the directors and members, meaning that the personal assets of these parties typically cannot be used to satisfy the debts and liabilities of the nonprofit. However, like for-profit corporations, nonprofits must follow the necessary formalities to demonstrate that they are acting like a corporation and should continue to receive the benefits the nonprofit corporation presents.

Professional Corporation (PC) or Professional Limited Liability Company (PLLC)

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Professional Corporations (PC) or Professional Limited Liability Companies (PLLC)

Professional corporations (PC) and professional limited liability companies (PLLC) are formed for the purpose of providing professional services. State laws determine what constitutes professional services and this classification often differs from state to state.

The meaning of the term "professionals" can vary from state to state, but typically includes professions that require a license-such as doctors, chiropractors, lawyers, dentists, accountants, architects, or engineers. Depending upon your selected state of incorporation, the following activities may be classified as Professional Services.
  • Accounting and Financial Services
  • Architectural Services
  • Legal Services
  • Medical Services
The initials P.C. or P.A. in the title of a doctor, dentist or lawyer indicate the professional has incorporated their practice.

State laws dictate the indicator that must be part of the corporate name-PC for Professional Corporation, PA for Professional Association, and PLLC for Professional Limited Liability Companies. Depending upon your state of incorporation, there may also be restrictions that require the profession to be listed as part of your company name (i.e., Lay Offices of John Doe, PC).

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