Which Business Entity is Right for You?

Choosing a legal structure for your business is important, and if you don't choose the state will choose for you.  The default business form for a one-person enterprise is a sole proprietorship and for two or more people it is a general partnership.  The sole proprietorship is not all that bad if you don't care to distinguish the business from yourself and you don't plan to involve anyone else.  However, a partnership entity does not protect the proprietor or partners from 100% liability.

The business form should suit the business activities.  Each business is different and does not operate in a vacuum, so it is important your unique objectives match the basic structure of your business.  You and your attorney should consider tax implications, liability, projected earnings, losses, capital expansion, leveraging, additional equity stakes, exit strategy, and estate planning.  The first major question to consider is the likelihood of your business going public.  A technology or pharmaceutical company may have a short period of licensing their product before selling out or going public as a C Corporation.  A service based company is not likely to go public.

There is also the important issue of liability for closely held companies.  As mentioned above, a general partnership and sole proprietorship do not have limited liability, but an S Corporation, Limited Partnership (LP), and Limited Liability Company (LLC) do.  These three entities not only have limited liability but also pass through taxation. 

With that in mind, let's discuss your three top choices for a closely held enterprise:


1. S Corp

S Corps are corporate entities and thus fall under the state's corporate statute which means there is a limit to the type of business activity.  The limitations include a maximum of 100 shareholders, no different classes of stock, and no foreign shareholders.  S Corp is a common form for family businesses that pre-date the creation of LLCs.


2. LP

A Limited Partnership with a corporate general partner is one way to take advantage of pass through taxation and maintain limited liability.  However, there are managerial limits with an LP - limited partners cannot exercise control or they forgo their limited liability.  An LP is a good form for passive investors (ie, real estate developer) or venture funded businesses to offer investors equity without control of the business activities.  As a partnership, an LP retains some flexibility. 


3. LLC

A Limited Liability Company (not Corporation) does not sacrifice limited liability, flexibility of control, freedom to contract, or pass through taxation.  An LLC has members instead of shareholders or partners.  It is a catchall entity because it does most everything an S Corp and LP do with minimal shortcomings.  Those shortcomings include no public trading, state level taxation, lack of familiarity (it is still a new entity for accountants, courts, etc. so the differences between corporations and partnerships are still being worked out), and issues with selling the entity or ownership interests.  An LLC is still the quick answer to which form your business should take... for now.