Business Entity Matrix

Selecting the best legal structure for your business is one of the most important decisions you will make. It will affect how you pay taxes, and it impacts your personal liability, the amount of money you can raise, and the degree of administrative paperwork you'll be required to complete.

The following table provides an overview of the various legal structures available, including: sole proprietorships, general partnerships, limited partnerships, limited liability companies (LLCs), corporations in general, S corporations and nonprofits. For each form, we provide information about four major characteristics:

Characteristics: The primary characteristics of the structure
Management Control: How management of the business is distributed
Financial Liability: Who is liable for financialobligations
Tax: How business income is reported and taxed
Duration: What happens to the business when the ownerwithdraws or dies

SoleProprietorship
Characteristics	Management Control	Financial Liability	Tax	Duration
Business has a single owner; the most common form of business organization; easy to form	Owner retains complete control over the business.	Owner is solely liable for all financial obligations of the business, putting personal assets at risk.	All income and expenses are reported on the owner's personal income tax return.	Business terminates when owner dies or withdraws.
General Partnership
Characteristics	Management Control	Financial Liability	Tax	Duration
Involves two or more people who agree to share in the profits or losses of the business. Profits or losses are "passed through" to partners to report on their individual income tax returns.	Each partner may enter contracts and make business decisions, unless stipulated otherwise in the partnership agreement.	Each partner is liable for all business debts.	All partners report partnership income on theirindividual tax returns. The business does not pay any taxes as its own entity.	A partnership dissolves when a partner withdraws or dies, unless the agreement stipulates otherwise.
Limited Partnership
Characteristics	Management Control	Financial Liability	Tax	Duration
One or more general partners manage the business while limited partners contribute capital and share in the profits but take no part in managing the business. This structure encourages investment without risk beyond the capital contributed.	General partners manage the business.	General partners are personally responsible for the obligations of the partnership. Limited partners have no liability beyond their investment.	Partnership files annual taxes. Limited and generalpartners report their share of the partnership income or loss on their individual returns.	Unless the agreement stipulates otherwise, the death or withdrawal of a general partner may dissolve the business, but the death or withdrawal of a limited partner does not.
Limited Liability Company
Characteristics	Management Control	Financial Liability	Tax	Duration
A cross between a partnership and a corporation; combines the "pass-through" treatment of business income in a partnership with the limited liability given to corporations	Owner or partners manage the business and make all decisions.	In most cases, the LLC (not the partners) is liable for business obligations.	The partners report income and pay tax through their individual tax returns.	Regulations on the continuation of LLCs vary by state.
Corporation
Characteristics	Management Control	Financial Liability	Tax	Duration
A corporation is a legal entity and assumes a separate legal and tax life from its shareholders.	Shareholders appoint a board of directors, and officers are elected by the board of directors to manage the business.	Shareholders are usually responsible for the amount of their investment in corporate stock.	The corporation pays its own taxes at the corporate tax rate. Shareholders pay taxes on dividends at the individual shareholder's tax rate.	As a legal entity, a corporation may survive the deaths of its owners, partners and shareholders.
S Corporation
Characteristics	Management Control	Financial Liability	Tax	Duration
S Corporation status may be elected after a corporation is formed. Corporations that file for this status are taxed like a partnership or sole proprietorship rather than as a separate entity. Income is "passed-through" to the shareholders.	Shareholders appoint a board of directors, and officers are elected by the board of directors to manage the business.	Shareholders are usually responsible for the amount of their investment in corporate stock.	Shareholders report their shares of the corporation's profit or loss in their individual tax returns.	As a legal entity, a corporation may survive the deaths of its owners, partners and shareholders.
Nonprofit Corporation
Characteristics	Management Control	Financial Liability	Tax	Duration
Nonprofit corporations are formed when the organization's purpose is other than to generate a profit and no income will be distributed to the officers or directors of the corporation.	Usually managed by a board of directors or trustees; officers, who may receive salaries, usually handle daily operations.	Directors, officers and members of the nonprofit enjoy limited liability; they are protected from personal liability for the corporation's debts and legal obligations.	Nonprofit corporations are exempt from paying taxes, but they must file for this exemption at both state and federal levels.	Nonprofit corporations cannot be sold. If the corporation's directors decide to dissolve it, all debts and obligations must be satisfied, and assets must be distributed to another tax-exempt nonprofit corporation.

In conclusion, sole proprietorships and partnerships give you more control over the business, but they also have higher liability. If you operate a business where you could potentially face lawsuits, it is strongly advised that you pick an entity that removes your personal assets from being at risk. Corporations and Limited Liability Companies are entities that are more complicated to operate in sense of paperwork, but your personal assets are safe. To start your corporation or LLC, we recommend MyCorporation.com.