The Corporate-Form Menu
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:
|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|
|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|
|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 limited-partnership variation, limited partners' liability can be restricted to amount of original investment.
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