Business Ownership
Ownership questions ask you to compare entity forms on liability, taxation, continuity, formation, and control, and to match an entity to an owner's goals.
The main forms
Sole proprietorship: one owner, easy and cheap to start, taxed once on the owner's return, personal liability, ends with the owner. General partnership: two or more owners, pass-through taxation, joint and several unlimited liability, dissolved by a partner's withdrawal unless the agreement provides otherwise. Limited partnership: at least one general partner with unlimited liability and limited partners liable only to their investment. Limited liability company: limited liability for all members, pass-through taxation by default, flexible management, formed by articles of organization plus an operating agreement. Corporation: a separate legal person with limited liability, perpetual life, centralized management through a board, articles of incorporation and bylaws, and double taxation for C corporations. S corporation: a tax election rather than a state entity - corporate liability protection with pass-through taxation, limited to eligible shareholders (generally no more than 100, and not partnerships or nonresident aliens). Cooperative: owned and democratically controlled by member-users, distributing patronage dividends.
Key contrasts
Capital formation is easiest for corporations, which can sell stock. Continuity favors corporations and LLCs. Privacy favors LLCs and S corporations. Liability protection separates corporations and LLCs from proprietorships and general partnerships. Common stock carries voting rights and residual claims; preferred stock has priority dividends and liquidation claims but usually no vote.
Worked example
Two consultants want limited liability, pass-through tax treatment, minimal formality, and unequal profit splits. A corporation gives liability protection but double taxation; a general partnership gives pass-through taxation but no liability shield; an LLC supplies both and permits unequal distributions if the operating agreement says so. If they later want outside investors and stock options, converting to a C corporation becomes attractive despite double taxation.
Traps
Calling an LLC a tax classification; assuming an S corporation is created by the state; forgetting that limited partners lose protection if they manage; and treating preferred stock as safer in every respect.