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HOW TO INCORPORATE

The Corporate-Form Menu

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The most popular types of corporate structure differ in many subtle ways, but these are the biggest differences among them.

For a comprehensive discussion of the pros and cons of various forms, be sure to consult a qualified lawyer or accountant.

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Choose a Corporate Form:

Corporate
structure
Ownership rules Tax treatment Liability Pros and cons
SOLE PROPRIETORSHIP One owner Pass-through federal tax entity* Unlimited personal liability for business debts Is easy to set up but leaves your personal finances at risk. Plus, you miss out on all kinds of business deductions
S CORPORATION Up to 75 shareholders; only one basic class of stock; slight flexibility on voting rights Pass-through federal tax entity* Limited Is easy to set up but may limit your financing options later on
C CORPORATION Unlimited number of shareholders; no limits on stock classes or voting arrangements Dividend income gets taxed at the corporate and shareholder levels; losses and deductions stay at the corporate level Limited Can be costly from a tax perspective but investor friendly
LIMITED-
LIABILITY COMPANY
Unlimited number of "members"; flexible membership arrangements, with voting rights and income divided as desired Pass-through federal tax entity* Limited Has lots of advantages but makes investors leery, which could make financing deal dicey. Cost of switching forms from S- or C-corporation status is generally prohibitive
PARTNERSHIP Two or more owners Pass-through federal tax entity*; flexibility about profit-and-loss allocations among partners Personal assets of any operating partner at risk from business creditors** Allows lots of room to play with tax benefits, but in a general partnership, that personal liability can be scary
LIMITED-
LIABILITY PARTNERSHIP
Two or more owners Pass-through federal tax entity*; some flexibility about ownership arrangements Limited As an alternative to traditional partnerships, has many advantages. Is easy enough for partnerships to switch to - but is a new form and hasn't gained acceptance in all states
*In a pass-through tax entity, income and losses "pass through" to owners and are taxed by the IRS at the personal level.
**In limited-partnership variation, limited partners' liability can be restricted to amount of original investment.

Last updated: Dec 1, 1997




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