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Legal Forms of Business Comparison

Provided by the Missouri Small Business and Technology Development Centers

Summary of Non-Tax factors for Various Legal Forms of Business Organization

  Sole Proprietorship  General Partnership  Limited Liability Partnership1  Limited Liability Company  S Corporation  C Corporation 
Life  Limited to life of proprietor. Can sell or gift assets to another person Generally set up for a specific agreed term; usually will be terminated by death, withdrawal, insolvency or legal disability of a general partner Generally set up for specific agreed term; usually will be terminated by death, withdrawal, insolvency or legal disability of a general partner  A dissolve date must be stated at filing Perpetual life  Perpetual life
Legal Liability  Unlimited Unlimited Limited Limited  Limited  Limited
Acquisition of Capital Limited to what proprietor can raise Limited to partner contributions Limited to partner contributions Limited to member contributions Limited in that there can only be one class of stock outstanding, but the corporation could sell bonds or more stock so long as that would not be considered a second class of stock  May sell stock or bonds to the public
Management  All decisions by proprietor Usually all general partners are active Governed by the partnership agreement Usually managed by members, but can have separate managers Much flexibility. Control usually exercised by officers and directors. Much flexibility. Control usually exercised by officers and directors.
Salaries to Owners  Amounts paid to owner are considered partial distributions on income. Can put spouse and children on payroll if they perform actual services for reasonable salary. Children 18 and under not subject to social security withholding or unemployment taxes. Spouse also not subject to unemployment taxes. This offers substantial tax savings benefits. Partners are not employees. Amounts paid are considered partial distributions of income. Partners are not employees. Amounts paid are considered partial distributions of income. Partners are not employees. Amounts paid are considered partial distributions of income. Owners may be employees. Salaries are taxable to them and deductible by the corporation, subject to certain limitations. Owners may be employees. Salaries are taxable to them and deductible by the corporation, subject to certain limitations.
Taxes on Income and Expenses  All income and expenses reported on proprietor's individual tax return. Divided among partners in accordance with investment or partnership agreement and reported on partner's individual returns Divided among partners in accordance with investment or partnership agreement and reported on partner's individual returns Divided among members in accordance with investment or operating agreement and reported on member's individual returns  Passed directly through to the shareholders according to the amount of stock held. Generally no income tax paid by corporation. Taxed separately at the corporate level, again at the shareholder level if distributed as a dividend
Transfer of Interest Easy because all assets owned by individual proprietor Right to distributions easy to transfer, interest in assets and right to management cannot be transferred without consent of other partners Right to distributions easy to transfer, interest in assets and right to management cannot be transferred without consent of other partners  Economic rights are transferable, management rights transferable with consent of other members Stock easy to transfer unless restricted by agreement, by articles of incorporation or by being statutory close corporation. In practice it is normally better for the buyer to purchase "assets only" from a corporation to eliminate any surprises of liability for the buyer. Stock easy to transfer unless restricted by agreement, by articles of incorporation or by being statutory close corporation. In practice it is normally better for the buyer to purchase "assets only" from a corporation to eliminate any surprises of liability for the buyer.
Liquidation of Business At the discretion of the proprietor, treated as sale of individual assets Required upon withdrawal of a partner unless partnership agreement permits business continuation Required upon withdrawal of a partner unless partnership agreement permits business continuation  Required upon withdrawal of a member unless partnership agreement permits business continuation Normally a two-thirds vote of shareholders is required Normally a two-thirds vote of shareholders is required
Pension or Profit-Sharing Plan A sole proprietorship may have several different pension and profit sharing plans to choose from . Examples: IRAs, simple plans or a form of a 401K plan Partners may participate only in  a self-employed qualified plan, which must be much more restrictive in its coverage and provisions; where no qualified plan is maintained, employees may set up IRAs Partners may participate only in  a self-employed qualified plan, which must be much more restrictive in its coverage and provisions; where no qualified plan is maintained, employees may set up IRAs  Partners may participate only in  a self-employed qualified plan, which must be much more restrictive in its coverage and provisions; where no qualified plan is maintained, employees may set up IRAs Owners are employees and can be included in a regular, qualified plan. However, limitation exists on amount of contribution for benefit of certain stockholder employees; where no qualified plan is maintained, employees may set up IRAs (same as corporation.) Owners are employees and can be included in a regular, qualified plan; where no qualified plan is maintained, employees may set up IRAs
Major Advantages Easiest and least cost to start. Independence, flexibility, minimum of record keeping, tax reporting and legal requirements Additional management input and operational responsibilities shared, additional capital and equity available, flexibility, shared overhead means increased profits, limited liability with RLLP2 Additional management input and operational responsibilities shared, additional capital and equity available, flexibility, shared overhead means increased profits, limited liability with RLLP2 Same as partnership plus limited liability without having to file annual documents, can be treated as any business form for income tax purposes Limited liability, profits taxed once, direct pass through of income and expense to shareholder Limited liability, can offer fringe benefits to owners and deduct them for income tax purposes
Major Disadvantages Unlimited liability, limited life, limited management ability, limited investment potential3 Unlimited liability unless RLLP, annual renewal filing to keep RLLP, limited life, relations among partners can cause problems, changes of partners or partnership agreement may be difficult3 Unlimited liability unless RLLP, annual renewal filing to keep RLLP, limited life, relations among partners can cause problems, changes of partners or partnership agreement may be difficult3 Relations among members can cause problems, changes of members or operating agreement may be difficult3 Not every corporation can qualify, cannot deduct fringe benefits for owners or their families, relations among shareholders or directors can cause problems3 Difficult to get assets out or to sell business wihtout double tax, relations among shareholders or directors can cause problems3

 

Source: Arthur Anderson and Kenner & Speck, LC

1 - Not to be confused with Limited Partnership

2 - RLLP = Registered Limited Liability Partnership

3 - In practice, liability is often not limited in forms of ownership other than a sole proprietorship or partnership because of loan guarantees, personal service corporations, etc. In these cases shareholders may be held accountable for corporate liabilities. Sometimes these liabilities may be covered with affordable insurance. Therefore, sole proprietorships and partnerships can often be just as appropriate as other legal forms. The best choice must be determined on a case-by-case basis, with personal tax situations often the key factor.