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Learn about entity choices like sole proprietorship, C and S corporations, LLCs, and single-member LLCs. Familiarize yourself with filed documents, governing structures, liability protection, naming conventions, ownership types, equity classes, taxation methods, and more. Avoid common pitfalls and discover keys to success in selecting the right business entity for your needs. Questions on choice of entity? Get expert guidance from Chris Hazlitt, Faegre & Benson LLP, with generous assistance from Susan Morley.
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CHOICE OF ENTITY CHRIS HAZLITT* FAEGRE & BENSON LLP *WITH GENEROUS ASSISTANCE FROM SUSAN MORLEY
Entity Choices • Sole Proprietor • C Corporation • S Corporation • Limited Liability Company • Single Member LLC
Filed Documents • Sole Proprietor – None • C Corporation – Articles of Incorporation • S Corporation – Articles of Incorporation and S Corporation Election (Form 2553) • LLC (both) – Articles of Organization
Governing Documents • Sole Proprietor – None • C Corporation and S Corporation – Articles of Incorporation, Bylaws, and Shareholder Agreement • LLC – Articles of Organization and Operating Agreement • Single Member LLC – Articles of Organization and short form Operating Agreement
Names • Sole Proprietorship – No requirement • C Corporation and S Corporation – “Corporation” (or “Corp.”), “Incorporated”(or “Inc.”), “Company” (or “Co.”), “Limited” (or “Ltd.”) • LLC – “Limited Liability Company” or “LLC”or “Limited”
Designation of Owners • Sole Proprietorship – Owners • C Corporation and S Corporation – Shareholders • LLC - Members
Liability Protection • Sole Proprietor – None (unless insured) • C Corporation and S Corporation – Limited personal liability unless corporate veil is pierced • LLC – Limited personal liability unless “corporate” veil is pierced
Piercing the Corporate Veil • Failure to observe corporate formalities • Commingling business funds with personal funds • Single business entity theory
Types of Owners • C Corporation – No limitation on types of persons who can be shareholders • S Corporation – Only individuals, estates, and certain trusts can be shareholders; individuals must be US citizen or US resident • LLC – No limitation on types of owners except individuals must be 18 years of age
Number of Owners • C Corporation – No limitation • S Corporation – Cannot have more than 75 shareholders • LLC – May have as few as one member
Equity • C Corporation – May have different classes of stock with different voting and economic rights (including stock options and stock warrants) • S Corporation – Cannot have more than one class of stock, but may have nonvoting stock • LLC – May create any economic and management relationships
Taxation • Sole Proprietor – Schedule C(Form 1040) • C Corporation – Separate taxpayer(Form 1120) • S Corporation – Flow through taxation(Form 1120S and Schedule K-1) • LLC – Flow through taxation(Form 1065 and Schedule K-1) • Single Member LLC – Schedule C
Compensation • Sole Proprietor – Self-employment income • C Corporation – Salary subject to employment tax and withholdings; excess as dividends • S Corporation – Salary subject to employment tax and withholdings; “dividend” loophole • LLC – Self-employment income (no withholdings); make estimated tax payments • Single Member LLC – same as sole proprietor
Miscellaneous • Intellectual Property • Patents • Colorado Business Registration • Taxpayer Identification Number • Payroll • Insurance • Annual Reports • Secretary of State – Online filings • Annual Meetings/Minutes
CHOICE OF ENTITY CHRIS HAZLITT* FAEGRE & BENSON LLP *WITH GENEROUS ASSISTANCE FROM SUSAN MORLEY
