Of the five basic business structures, three have unlimited life and limited liability. Unlimited life means your company will operate forever unless it is formally dissolved. Limited liability protects you from being personally responsible for business debts or legal judgments against your company. The business structure you select depends on, among other things, whether you want to take your company public, if you want to limit the number of shareholders or avoid paying taxes at the corporate level.
C corporations have unlimited life and limited liability. You can take your C corporation public and have your stock listed for sale on the New York Stock Exchange or Nasdaq. C corporations can have an unlimited number of stockholders and raise unlimited amounts of cash. However, publicly traded C corporations are highly regulated by federal agencies such as the Securities and Exchange Commission. C corporation profits are taxed twice: once at the corporate level and once on the individual level when profits are paid out as dividends.
Like C corporations, S corporations have unlimited life and provide its owners with limited liability protection. However, you cannot take your S corporation public and sell your stock on a stock exchange. This is an important consideration if you need to raise large amounts of capital to grow your business. You cannot have more than 100 stockholders and each one must be a U.S. citizen or a resident. S corporation profits and losses flow through the company to the owners and are reported on individual income tax returns.
Limited Liability Company
A limited liability company (LLC) has unlimited life and limited liability for its members. There’s no limit to the number of shareholders you can have. Your shareholders can be U.S. citizens, residents, foreigners, partnerships and corporations. Like an S corporation, profits and losses flow through the LLC to the members. However, you cannot take your LLC public and sell stock to the public. Some states restrict the type of professions that can operate as an LLC. For example, if you live in California and you’re an architect, accountant, doctor or lawyer, you cannot operate your business as an LLC.
Read More: Advantages & Disadvantages of a Limited Liability Company
Partnerships and Sole Proprietorships
Partnerships and sole proprietorships are unincorporated business entities with limited life and unlimited liability. A partnership and sole proprietorship ends with the death of a partner or the sole proprietor. In the case of a partnership, you must execute a new partnership agreement every time a partner dies, leaves or a new one is added. You have no personal protection from lawsuits and are personally liable for your partnership or sole proprietorship debts. You cannot issue or sell stock privately, let alone publicly. Business profits and losses flow through to the partners or the sole proprietor and reported on individual income tax returns.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.