Business Formation Chart

Sole ProprietorshipPartnershipC CorporationS CorporationLLC
Are Ownership Shares TransferableThe individual owner is free to transfer his ownership shares at any time.In both General Partnerships and Limited Partnerships in order for partners to completely transfer their interests, there must be unanimous consent among the members unless it says otherwise in the Partnership Agreement. The financial rights of the partners are freely transferable.Ownership shares of the corporation are freely transferable unless it is stated otherwise in the Articles of Incorporation, By-laws, or Shareholder Agreement.Ownership shares of the corporation are freely transferable unless it is stated otherwise in the Articles of Incorporation, By-laws, or Shareholder Agreement.Members can freely transfer their financial rights, but transfer of governance rights and transfer of complete membership interest requires the unanimous consent of the members.
Who Governs the EntityThe individualFor a General Partnership, partners have equal say in management unless they have agreed otherwise in the Partnership Agreement. This is different for a Limited Partnership. In a Limited Partnership, the general partner controls the obligations of the limited partners and manages the business entity. The limited partner has no control of the management of the company.The Board of Directors of the corporation manage the corporation. Management of the corporation may vary depending on the corporation's Shareholder Agreement.The Board of Directors of the corporation manage the corporation. Management of the corporation may vary depending on the corporation's Shareholder Agreement.The Board of Governors manage the business. If there is no Board of Governors established in the Articles of Organization, management may be decided by the Member Control Agreement.
Income TaxOwner files business profits or losses on his or her personal income tax return. This is a pass through entity, meaning that the owner files the tax on his or her personal income tax returns so that the income tax passes through the business to the owner.Each partner files his share of the partnership's profits or losses on his or her own income tax return. The company does not pay income tax, because the profits or losses passes through the business to the partners. The business will still need to report annual information such as income, deductions, gains and losses from its operations to the IRSA C Corp is a separate legal and tax entity, which means that the corporation is taxed like a separate person. The corporation conducts business, calculates net profits or loss, pays taxes, and distributes profits to shareholders. The corporation's profits are taxed to the corporation when earned and then taxed to the shareholders when the profit is distributed as dividends. This is a double tax.S Corps can elect to have their income tax pass through from the business to the shareholders The shareholders then file the profits and losses on their own personal tax returns. The S Corps differs in this way from the C Corp because the S Corp avoids double taxation as the business is not taxed at a business level like the C Corp.Members pay taxes on their shares of the business income on their own personal tax returns. The income passes through the business to the members.
Number of Owners AllowedOneTwo or moreNo limitNo more than 100 ownersNo limit
Legal Documents Needed at FormationNone; however, owner still needs to file state and local licensing laws and taxation laws.Partnership AgreementArticles of IncorporationArticles of IncorporationArticles of Organization
Limited LiabilityIndividual owner is personally liable for any business related obligations including debt and court judgments.In a general partnership, each partner is individually liable for the entire amount of any business debts and claims. In a limited partnership, the general partner is personally liable for the business debts incurred, but the limited partners have no personal liability other than their initial investment.Shareholders' liability is limited to the amount of their investments, they are otherwise not personally liable for the debts incurred by the corporation. A Shareholder may be liable for the debt of the company if the shareholder played a role in contributing to the business debt.Shareholders' liability is limited to the amount of their investments, they are otherwise not personally liable for the debts of the corporation. An S Corp must follow several corporate formalities to keep limited liability protection.Liability of the members is limited to the amount of their investments. They are otherwise not personally liable for business acts, debts, obligations, or liabilities of the company.
Who Can Be an OwnerIndividual onlyTwo or more individualsIndividuals as shareholdersIndividuals as shareholders, certain trusts and estates; partnerships and corporations cannot be shareholders.Individuals, corporations, other LLCs, and foreign entities.
Quick DescriptionAn individual who wants to start an unincorporated business by him or herself.Two or more people want to join together to carry on a business or trade. Each partner contributes money, property, labor or skill and expects to share in the profits and losses of the business. A partnership can be either a General Partnership or a Limited Partnership.Shareholders exchange money, property, or both and receive a corporation's capital stock in return. Shareholders own the corporation, but the corporation conducts business as a separate taxpaying and legal entity.A corporation that chooses to pass its corporate income, losses, deductions and credit through to the shareholders, rather than be taxed as a separate entity, like a C Corporation.A business that chooses to have income and losses pass through to owners/members rather than be taxed as an entity.


Partnership Definitions

General Partnership:

When two or more people decide to add their capital and skills to conduct a business for profit. There are three general elements to a general partnership: (1) a sharing of profits and losses between the partners, (2) partners have joint ownership of the business, and (3) partners have an equal right in the management of the business.

Limited Partnership:

A partnership when there is at least one general partner and one or more limited partners. The general partner creates a company, and the general partner then solicits investments from others who become the limited partners. A general partner has all of the responsibility for management of the business and the limited partner contributes capital for the business but has no management rights of the business. The general partner is personally liable for business debts incurred, whereas the limited partner is not.

Partnership Agreement:

Can be written, oral, or implied, however, some agreements must be in writing (particularly if the partnership is to continue for more than one year). The agreement specifies partners’ shares of the profits, as well as names of the partners and partnership, location, purpose, and duration of the business, capital contributions of the partners, breakdown of sharing of profits and losses, management and control of the business, accounting and partnership records, what happens upon dissolution of the partnership, and any other factors that the partners deem important.

Corporation Definitions

Articles of Incorporation:

Document that includes basic information about the corporation. Serves as a central source of authority for future organization and business operations. Typically the articles include: name of the corporation, nature and purpose of the business, duration, capital structure, registered office and agent, and names of the incorporators (the people forming the corporation).

Board of Directors:

Governs the corporation. The number of directors is established in the articles of incorporation or the by-laws. The board conducts business through meetings with recorded minutes. The board has the responsibility to authorize major corporate policy decisions, to appoint, supervise, and remove corporate officers and other management, and to make financial decisions.

Corporate Officers:

Officers are employees of the corporation, who are hired by the board of directors to carry out duties stated in the by-laws


The internal rules of management for the corporation. The shareholders, directors, and officers must follow the by-laws when conducting business for the corporation. They most often provide the process for election of the board of directors, the process for replacing directors, and the manner and time of scheduling meetings (shareholder and board meetings).

Shareholder Agreement/Shareholder Control Agreement:

Written agreement among shareholders that addresses the control of any part of the business and operations of the business, including dissolution and liquidation, and relations among the shareholders. These often contain information about when unanimous approval is needed from the shareholders, stipulations on transferring shares, restrictions on issuing shares, as well as other matters relating to the shares of the corporation.

LLC Definitions

Articles of Organization:

The equivalent to the articles of incorporation for a C Corp or S Corp. Information in the articles of organization include the name of the company, registered address and registered agent, and the name and address of each orgnanizer (the people forming the LLC).

Board of Governors:

The equivalent to the board of directors of a C Corp or S Corp. The board handles the business and affairs of the LLC. The board is established and regulated by either the articles of organization or the member control agreement.


Equivalent to a corporation’s corporate officers. Managers handle and supervise the daily operations of the business and follow the instructions of the board of governors.

Operating Agreement:

The LLC’s equivalent to the corporation’s by-laws. This is optional for an LLC, and can be adopted by the first board of governors. If the LLC decides to have an operating agreement, the agreement is in place to regulate the election of the governors and to detail the duties of the managers and the meetings of the members.

Member Control Agreement:

This agreement can have any information relating to any aspect of the business and operations of the LLC as long as it is signed by all of the members. Such an agreement can include the right to transfer membership interest, the payment of distributions, sharing of profits and losses, election of governors and managers, employment of members, what happens upon dissolution, termination, or liquidation of the business, and what procedure to follow when there are disputes between the members. It is advised that member control agreements should be negotiated and drafted before the formation of the LLC.