Business Structures: Sole Proprietorships to LLCs

sole proprietorship

A business owned and operated by one person, with full control and unlimited personal liability.

taxation of a sole proprietorship

Profits are taxed as personal income to the owner (pass-through taxation).

general partnership

A business owned by two or more people who share profits, losses, and control.

joint and several liability in a partnership

Each partner can be held fully liable for all partnership debts and obligations.

limited partnership (LP)

A business with at least one general partner and one limited partner.

role of a limited partner in an LP

They invest money but do not manage the business and have limited liability.

C corporation

A legal entity owned by shareholders, offering limited liability but subject to double taxation.

double taxation in a C-Corp

The corporation pays income tax, and shareholders pay taxes again on dividends.

S corporation

A corporation that avoids double taxation by allowing profits/losses to pass through to shareholders.

limitations of an S Corporation

Must have ≤ 100 shareholders who are U.S. citizens or residents; only one class of stock.

Limited Liability Company (LLC)

A flexible business structure offering limited liability and the choice of tax treatment.

ownership of an LLC

Members (not shareholders); can be individuals, corporations, or other LLCs.

taxation of an LLC

By default, pass-through taxation; can elect to be taxed as a corporation.

piercing the corporate veil

A legal action that holds owners personally liable if corporate formalities are ignored.

derivative lawsuit

A lawsuit brought by a shareholder on behalf of the corporation, usually for breach of fiduciary duty.

fiduciary duty

The legal obligation to act in the best interest of the corporation (duty of care and loyalty).

dissolution of a general partnership

It dissolves unless otherwise agreed upon when one partner leaves.

LLC vs corporation

LLCs offer flexibility, limited liability, and avoid double taxation.

continuity in business organizations

The ability of a business to survive changes in ownership.

startup transition from LLC to C-Corp

To start flexibly and avoid double taxation, then restructure to attract investors.