Most states, including Louisiana, recognize several business structures. Here is a brief overview of 5 of the choices of business entity.*
- A Sole Proprietorship is where an individual person is doing business under their own name. There is no limit to the liability (risk) you are exposed to since your personal assets are at stake. You can only transfer the interests in your business by selling the assets themselves, which could increase your tax liability. Under this type of business entity, your access to capital can be limited, depending on your individual creditworthiness, or access to collateral.
- A General Partnership is like a sole proprietorship but differs in that it has two more individuals (or entities) who have a combined ownership of the business. No formal organizational requirements must be formed, and no formal management or governance is required. Any partner of the partnership can bind (enter legal contract) with the partnership. Like a sole proprietorship, there is no limit to the amount of liability for the partners, and taxes are paid at the individual partner’s level. The individuals in this entity may also be subject to paying self-employment taxes, as well.
- Corporation– Under most state laws, there is only one kind of corporation; however, from a federal tax perspective, there are two: A C-Corporation, and an S-Corporation. Each of these corporations have rigorous management/ governance structures and require that a certificate of formation to be filed with the Secretary of State. Corporations also require a registered office and agent for service of process in Louisiana, and at least one director to oversee overseeing the corporation’s business; at least one president and secretary as officers; and require at least one annual meeting of the directors and shareholders of the corporation to take place to elect directors and officers.
- C Corporations have no limit in the number of shareholders they may have. The shares of a corporation can be sold to anyone, but because they are a separate legal entity, they pay federal and state taxes as a legal entity, and the individual share holders must pay taxes on whatever dividends (distribution of earnings) that are paid to them. Because of the double taxation feature of a C-Corporation, it is generally not a desirable business structure for small businesses.
- S Corporations are named as such, because of Subchapter S of the Internal Revenue Code. From a governance and state law perspective, S-Corporations are essentially the same as C-Corporations, but are viewed as a partnership, or sole proprietorship for taxation purposes.
- Limited Liability Companies may be organized as either being managed by members, or more like a partnership. If it is managed by members, the set up is like that of a corporation, with manager(s) running the business, while members do not (like shareholders). LLCs are formed when a certificate of formation is filed with and accepted by the Secretary of State. These certificates of formation are required to state whether the LLC will be manager or member managed, and sets forth the names of each initial manager, or member manager. These structures are very flexible in terms of being able to transfer interests, but those interests cannot be publicly traded. There is no limitation on the number or types of members, but the number of owners determine who is liable for taxation purposes.
- Limited Partnerships are where certain partners have limited liability (limited partner) in the company, and at least one partner (general partner) has unlimited liability. Like LLCs, Limited Partnerships must file a certificate of formation with the Secretary of State and are taxed similarly to LLCs.
*Disclaimer: This information is provided for informational purposes, and shall not constitute legal advice, or create an attorney-client relationship. The laws referenced in this document may have changed or could be affected by case law developments. Please consult your personal attorney for specific counsel regarding your business.
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