Main considerations:

  • Taxation
  • Liability

Other considerations:

  • Nature of business
  • Control
  • Raising capital
    • Investing
    • Borrowing
  • Transferring ownership:
    • Distribution of appreciated assets
    • Adding new owner
    • Exit of existing owner (buyout, death)
    • Sale of business



There are two basic systems for taxing businesses:

  1. Taxation of both the entity itself and of the owners
    • C corporation (C corp.) for reasons we’ll see shortly--corporate “double tax”
    • Taxation on corporate earnings and on salary or dividends to owners.
  2. "Pass-through" taxation--a "flow-through" entity is not taxed but its owners are each taxed on their proportionate shares of the entity’s income. 
    • Sole Proprietorship (not a separate entity)
    • Partnerships
      • General partnership
      • Limited partnership
      • LLP
    • "S corporations" (S corp), as distinguished from C corp
    • Limited liability companies (LLCs).



  1. S Corp and C Corp

·        Corporations provide best liability protection.

·        The S corp is a regular corporation with regular limited liability under state law.

·        Limitation of liability makes S corp the best choice—for business reasons—over other flow-through.   

·        S corps are subject to a number of significant rules and restrictions.

  1. Partnerships

·        Ordinary partnerships, called general partnerships, do not have limited liability under state law.

·        Limited partnerships limit liability for limited partners to the amount of their investments—can’t be active in management

·        General partner in has unlimited liability.

  1. Limited Liability Companies (LLCs)

·        Simpler and newer than S corp—most popular form of new business

·        Have limited liability features of corporations and pass-through characteristics of partnerships and S corps

·        More flexible than S corps.

·        Active management won’t affect limitation of liability.

·        Some states don’t allow LLC with only one member.

  1. Limited Liability Partnerships (LLPs)

·        Designed for professional partnerships (malpractice)