Entity Formation

A C-Corp is a legal entity that formally separates owners (the shareholders) from the corporation, such that shareholders are not personally liable for the debts or liabilities of the corporation. C-Corps are subject to “double taxation,” meaning the corporation is taxed on its net income, and shareholders are also taxed when the profits are distributed. If you plan to raise outside investment or have aspirations to take your company public, then a C-Corp is traditionally the right entity form.

An S-Corp is formed by filing for special tax status with the IRS. S-Corp status provides pass-through taxation, which means there is no tax at the corporate level, only when profits are distributed to shareholders. This tax-status causes significant limitations on who may be a shareholder, the number of shareholders and the stock classes.

An LLC combines the limited liability of a corporation with tax efficiency (i.e. no double taxation) and operational flexibility. The LLC operates as a type of hybrid of a corporation and a partnership. Like a corporation, an LLC limits the legal liabilities of the owners, called "members." Like a partnership, the LLC is a pass-though entity for tax purposes, which means that individual members are taxed only once on any profits to the LLC, as a form of personal income (unless they elect otherwise in the Operating Agreement).

A sole proprietorship isn’t a separate legal entity at all; rather, it is an unincorporated business run by one person. Because forming a sole proprietorship requires no formal action, it is the simplest and least expensive of business form. Sole proprietorship status automatically results from conducting business activities but creates no legal separation between you and your business. In a sole proprietorship, you are personally liable for all activities of the business: all expenses and debts of the business are yours and so are the tax obligations.

A general partnership is an association of two or more people conducting a business as co-owners. General partnerships can be formed by entering into a partnership agreement or by default when two or more partners act in concert. The partnership functions as a separate entity, but the liability of each partner is unlimited, both with respect to his own acts as well as acts of other partners.

A Limited Partnership is a variation on the general partnership. The entity consists of a combination of general partners, who manage the business and take on liability, and limited partners, who usually contribute capital, but only have limited liability. Unlike an LLC, there must be at least one managing partner who bears liability for the partnership’s actions.

When your company’s mission will be to support a charitable cause, you’ll want to consider forming a nonprofit corporation. To receive all the benefits--obtain private and public grants, low-cost postage rates, exemptions from income, sales and property taxes, and the ability to receive tax-free donations--a nonprofit must be registered with its state of operation and file for (501(c)(3)) tax-exempt status with the Internal Revenue Service. Every 501(c)(3) organization is classified as either a public charity or a private foundation, depending primarily on the level of public involvement. A private foundation is typically funded and managed by its own trustees or directors, while a public charity derives its funding from the general public.