What is the most advantageous form of business - a Corporation (C or S Corporation), a Limited Liability Company, a Partnership, a Limited Partnership, or a Sole Proprietorship?

Each form of business has characteristics that may make it desirable when setting up a new company. Following is a brief summary of the characteristics of the most common types of business entities. Some details are left out for brevity and ease of understanding.

1. The state filing fee for organization is $300.
2. A Certificate of Formation, Bylaws of the corporation, organizational minutes, and documents reflecting issuance of stock are required to be prepared as part of organization.
3. Annual Shareholder and board of directors meetings are required to be held, and stock records must be kept.
4. Perpetual existence is permitted.
5. All profits are considered income to the corporation, and undistributed profits may be accumulated.
6. Shares are transferable, subject to applicable laws and agreements.
7. A corporation is controlled by its board of directors, unless the board elects to require shareholder approval.
8. Directors owe a fiduciary duty to the corporation; Shareholders do not have personal liability unless they provide a personal guarantee.
9. A corporation must file its own income tax return, which is some expense each year. Income is taxed at the corporate level, and at the shareholder level if paid to the shareholders as dividends.
10. An annual franchise tax return is also required.

1. If a C Corp. removes all of its income, no additional tax is paid on the revenues of the C Corp. over that paid by an S Corp. or an LLC. If a C Corp. does not remove all of its income, a double taxation may result. If a C Corp. makes income during the year that is not removed from the corporation in the form of salaries, the C Corp. pays income tax on all such income. This income could take the form of dividends or capital expenditures, and does not have to be left sitting in the corporation in the form of cash. If some of the revenues have been spent on capital expenditures, it may be necessary to put more cash into the company in order to keep from paying income tax on the income spent in making capital expenditures. If the corporation pays dividends, it should pay income tax on the dividends. The dividends, being income to the individuals who receive them are taxed again on the individuals' tax returns. This has the effect of a double taxation on this amount of the corporate income.
2. If a C Corp. has a loss for the year, the loss may not be taken against the personal income of any of the shareholders and is wasted for the year. It may, however, be carried forward on the books of the C Corp. for a limited number of future years.
3. A C Corp. is subject to Texas Franchise tax, which is now the equivalent of a corporate income tax.

1. An S Corp. does not pay income tax on any income it makes. The income is passed proportionally to the income tax returns of its shareholders. The corporation, however, may take the same deductions, so there should be no difference in the amount of corporate income. Because of this, there is no double taxation on corporate income, as may happen with the C Corp.
2. If an S Corp. has a loss for the year, the loss is passed proportionally to the individual tax returns of the shareholders. This has the favorable effect of using the tax loss that year to reduce the other income of the individual shareholders.
3. An S Corp. is also subject to Texas Franchise tax, which is the now the equivalent of a state income tax.

1. The state filing fee for organization is $300.
2. A Certificate of Formation and a Company Agreement are required to be prepared as part of organization.
3. Certain written records must be kept available in the LLC's principal place of business.
4. An LLC automatically terminates upon death or withdrawal of a member, unless otherwise provided in its Company Agreement. Otherwise, the LLC may choose perpetual duration or specify an expiration date.
5. All profits are distributed to the members, as provided in the Company Agreement.
6. Membership interest is transferable, subject to applicable law. New members must receive consent from current members.
7. An LLC may elect to be controlled by its managers or by its members.
8. Members of an LLC have limited liability and certain asset protection.
9. Income is taxed at the member level only.
10. An LLC is also subject to the Texas Franchise tax, the state income tax.
11. Special allocations of income and loss are allowed.
12. Members may deduct the LLC's losses, but only to the extent of their tax basis in their LLC interest, which includes their allocation of the LLC debt.
13. Similar to a partnership or an S Corp., the income and loss of an LLC is passed directly to a member's personal tax return, so there is no double taxation as with a C Corp., and any losses can be taken against the member's other personal income.

1. There is no state filing fee for organization, and minimal set-up is required. A written partnership agreement is highly recommended, and licenses must be obtained.
2. Record keeping is minimal. New agreements are needed upon death, retirement, or termination of partner, unless a provision is already established in the current agreement.
3. A partnership automatically terminates upon death of a partner, unless provided for in the agreement.
4. All profits are income to the partners and may not be accumulated.
5. Partnership interest and substantial assets are usually transferable, subject to consent from the other partner(s).
6. All partners have equal management and ownership, unless otherwise established.
7. Partners have personal responsibility for obligations and actions, except with a Limited Liability Partnership.
8. Income is taxed at the partner level only.
9. A limited partnership is not subject to the annual franchise tax.
10. Special allocations of income and loss are allowed.
11. Partners may deduct the partnership's losses, but only to the extent of their tax basis in their partnership interest, which includes their allocation of the partnership debt.

1. The state filing fee for organization is $750.
2. A Certificate of Formation is required, and a written partnership agreement is highly recommended.
3. An LP must keep written accounts of admission and withdrawal of limited partners and acts requiring consent.
4. Death of a limited partner does not terminate the partnership; The partnership continues for the length of time stated in the Certificate of Formation.
5. All profits are income to the partners and may not be accumulated.
6. The interest of a limited partner is transferable, unless purposely restricted by the Certificate of Formation or the partnership agreement.
7. A limited partnership is managed by the general partner, except for certain acts requiring the limited partners consent.
8. Accordingly, the general partner has personal liability; limited partners have limited liability.
9. Income is taxed at the partner level only. A limited partnership is not subject to the annual franchise tax.
10. Special allocations of income and loss are allowed.
11. Partners may deduct the partnership's losses, but only to the extent of their tax basis in their partnership interest, which includes their allocation of their partnership debt.

1. There is no state filing fee for organization and minimal set-up required. An assumed name certificate needs to be obtained.
2. Minimal record keeping is required, except for business or tax purposes.
3. The business is left to the estate upon the death of the owner.
4. All ownership resides with the single proprietor, and all profits are income to the owner.
5. The assets of the company and the ownership are transferable.
6. The sole proprietor maintains personal liability.
7. Income is taxed at one level only.
8. Losses can be deducted easily.