Roger E. Barton, Esq.

An important initial choice facing a foreign individual or entity wishing to do business in the US is the form of business entity from which to conduct US operations. There is no single best choice of entity for all situations. Each entity has its own unique advantages and disadvantages. Choosing the right form has a lot to do with who will own the business and what its activities will be. Keep in mind that your initial choice of a business form doesn’t have to be permanent. You can start out as a sole proprietorship or partnership and later, if your business grows or the risks of personal liability increase, you can convert your business to an LLC or a corporation.

At the outset it should be realized that doing business in other countries can be quite different from doing business in the United States , especially from a tax perspective (in the absence of a treaty). In the United States , income taxes are imposed at the federal, state and local government levels. In addition to income tax, the federal government imposes customs duties, excise taxes, and estate and gift taxes. Most states and other local jurisdictions levy franchise, income and capital-based taxes as well as sales, use, property, estate and gift taxes. Transactions such as purchases and sales of assets, mergers, consolidations and liquidations may be taxable events. However, certain transactions may be effected tax free with appropriate advance tax planning.

Barton Barton & Plotkin, LLP specializes in representing foreign businesses of all sizes in the United States and can create a business entity for you in any of the 50 States in America . Based on our clients’ situations, we help advise them as to where in the US to create a company and which type of company would be most beneficial for their situation. Please contact Roger E. Barton at the address above or by e-mail at Rbarton@Bartonesq.com if you would like to discuss any matters in connection with starting your business in the United States .

The 5 Most Common Choices:

The five most common business forms are C corporation, S corporation, Limited Liability Company (LLC), Partnership, and Sole Proprietorship. Different business entities have advantages and disadvantages.

1. C Corporation. A C corporation is the traditional type of business entity. It is a separate legal entity, created pursuant to state law with powers and liabilities independent of its stockholders. As a separate legal entity, the C corporation can, among other things, enter into contracts, sue and be sued, and own property; it can do these things in its own corporate name. Unlike an S corporation, there is no restriction as to the type of shareholder (e.g. foreign person) that can own stock in a C corporation. Shareholders enjoy limited liability on corporation debts. Like limited partners in a limited partnership, shareholders in a C corporation are only liable to the extent of their capital contribution. Compared to some other business forms, however, the C corporation is more expensive to create and maintain. Corporations must follow certain “corporate formalities.” These formalities include such things as holding regular director and shareholder meetings, keeping separate books and records, and using the corporate name. They also must make annual reports and pay annual fees to the state. Diligent attention to these formalities is important. Without corporate formalities, owners risk losing the protections of limited liability afforded them by doing business in the corporate form. Operating as a C corporation form has its tax advantages and drawbacks. Net income or loss is taxed at the corporate level, and dividends are taxed to shareholders. Although double taxation can be an issue, there are methods to avoid it. The C corporation offers some significant advantages too. Generally, health insurance premiums and life insurance premiums are deductible by the corporation and not taxable to employees or stockholders of a C corporation. For emerging and growth companies, operating as a C corporation offers the possibilities of stock bonus plans and stock ownerships.

A corporation is formed by filing Articles of Incorporation with the Secretary of State. Corporations can be formed by one person and all owners can participate in management without jeopardizing their liability protection. A corporation must have at least one shareholder, and that shareholder can be a person or a company. There is no restriction on a foreign person or company being the shareholder(s). The management of a corporation consists of its directors and officers, usually, elected by its stockholders.

Corporations are established in accordance with the law of the state of incorporation. Although the corporate laws of most states are similar, those of certain states are more flexible than others. In particular, Delaware corporate laws are considered to be the most liberal. It is common practice to incorporate in a state with liberal incorporation laws and then qualify the corporation in those states in which it will operate by applying for a certificate of authority to do business. If business is to be conducted solely within one state, however, incorporation in that state is normally advisable.

A corporation may be formed for any legal purpose not prohibited by state statute. The corporation generally comes into legal existence as soon as its certificate of incorporation is filed with the secretary of state's office of the state of incorporation. The certificate of incorporation (referred to in certain states as the corporate charter) generally sets forth the basic business purposes of the corporation, the number of shares of each class of stock authorized to be issued and the rights of holders of each of these classes.

After formation, shares of stock are issued to the shareholders, bylaws are adopted, and a board of directors is elected. The board of directors manage the corporation and appoint a minimum of two (2) officers (president, secretary, treasurer) to maintain the ongoing daily affairs. The board usually consists of at least three (3) people. The laws require regular director and shareholder meetings be held, minutes of those meetings be kept, and any decisions made at those meetings be formalized in the form of written resolutions. Failure to maintain these records will jeopardize the corporate status and leave the stockholders vulnerable to persona attack and responsibility for tax liability and corporate debt.

A corporation will be taxed on its worldwide net income. The primary disadvantage to a corporation is the potential for double taxation. Earnings are first taxed at the entity level as income to the corporation, and then taxed again when distributed to the stockholders as dividends. However, all reasonable business expenses (including possibly the salary of a director)such as salaries are deductions against corporate income and can minimize the double tax.

A corporation may be subject to the taxing jurisdiction of more than one state. Although incorporated in only one state, the corporation may be “doing business” in several other states through branch operations or some other means. Each of these states may tax the part of the corporation's income that is apportionable to the particular state. Most states determine the portion of a corporation's income subject to tax by multiplying the corporation's federal taxable income, as adjusted for state modifications, by a three-factor formula based on that portion of the corporation's property, payroll and sales within the state.

Domestic corporations are subject to federal income tax on their worldwide taxable income. The current maximum effective rate is 35%. Subject to various limitations, a foreign tax credit may be claimed for income taxes paid or accrued to foreign countries. In addition to the income tax, a 30% withholding tax generally applies to dividends and other remittances paid to foreign shareholders, unless otherwise provided by treaty. This results in a possible combined effective federal income tax rate of 54.8% on earnings of a domestic corporation remitted to foreign shareholders.

In the United States , most large businesses operate as corporations. Corporations have a legal identity separate from that of their shareholders and continue in existence despite the death or disability of their shareholders. Shares may be freely transferred without obtaining approval of the remaining shareholders, unless an agreement imposing transfer restrictions has been reached.

For business structures with multiple US corporations, domestic investors commonly form a US parent holding company to hold the shares of the operating subsidiaries. The parent and subsidiaries may elect to file a US consolidated income tax return and determine taxable income on a group basis, similar to a financial consolidation.

Time Required

A corporation may be established quickly, sometimes within one to two days.

Incorporation Fees

State incorporation fees vary but generally range from $100 to $500, not including legal fees.

Number of Founders

Many states require at least three incorporators, one of whom must be a resident of the state of incorporation. In certain states, the residence requirement may be met by having a local legal counsel or other agent act as one of the incorporators. However, a recent trend among the states (for example, Delaware and New York ) is to require only one incorporator. The incorporators generally adopt the corporate bylaws, which set forth the internal rules and regulations by which the corporation is to be governed and define the rights and powers of its shareholders, directors and officers. The bylaws may later be amended by the directors or shareholders. When the corporation is formed and a board of directors is appointed, the duties of the incorporators end.

Permissible Types of Shares

Corporations may issue various types of shares, including common and preferred shares. These shares are not required to have a stated par value. Holders of common shares generally are entitled to vote and, on liquidation, participate in the distribution of the corporation's earnings and assets after liabilities to creditors and preferred shareholders have been satisfied. Holders of preferred shares usually have preference rights to receipt of dividends and assets on liquidation.

Minimum and Maximum Number of Shareholders

In general, most states do not prescribe a minimum or maximum number of shareholders.

Initial Capital Requirements

State laws generally do not have minimum capitalization requirements for corporations, except for those engaged in banking, insurance or related activities, but most states require that subscribed capital be fully paid in before authorized shares are issued.

Board of Directors

Unless required by the certificate of incorporation or the company's bylaws, a director generally need not be a shareholder of the corporation and need not reside in the state of incorporation or in the United States. Although management of the corporation technically is in the hands of the board of directors, who are elected by the shareholders, day-to-day operations generally are carried out by the corporation's officers, who are appointed by the board. Nevertheless, directors must make certain fundamental business decisions and have a fiduciary obligation to the shareholders.

Officers

The officers generally include a president, treasurer and secretary. The bylaws may also provide for one or more vice-presidents or other officers. The authority of the officers is usually specified in the corporation's bylaws or a board of directors' resolution.

Registration Fees

Most states impose a minimal annual franchise or registration fee, which must be paid in order to maintain the corporate franchise. The fee is payable regardless of whether the corporation has engaged in any business activity.

Income Tax Filing

Under federal law, domestic corporations must file an annual income tax return regardless of whether they have any taxable income. Most states have similar income tax filing requirements. In many states, the corporate income tax is referred to as a franchise tax and is commonly based on that portion of the corporation's taxable income and capital apportioned to the state based on state statutory apportionment formulas.

Initial Audit and Disclosure Requirements

Corporations that are not publicly traded have no initial audit or disclosure requirements. However, publicly traded corporations that wish to be listed on a national securities exchange must comply with SEC registration requirements

Audit Requirements

A company with securities traded on a public exchange is generally required to have its annual financial statements audited by an independent certified public accountant, who must confirm that the statements are in conformity with generally accepted accounting principles (“GAAP”). Audits of nonpublic companies may also be required by their bankers or major creditors.

2. S Corporations. This is a "small business corporation" which can only be owned by US residents and is therefore inappropriate for almost all foreign persons desiring to establish a business in the US . The S corporation is formed when you make a valid election with the Internal Revenue Service. The "S" designation is a federal tax designation. The rules governing S corporations are like a double-edged sword. While the government gives S corporations favorable tax treatment, they are subject to very restrictive rules about ownership, type of stock and business activity. S corporations cannot have more than 75 shareholders and a foreign person cannot be a shareholder. They can issue only one class of stock, however, the stock can have different voting rights. Additionally, some types of corporations are ineligible. An S corporation is a "pass through" entity for tax purposes; it passes profits and losses generally through to its shareholders; thus, there is generally no tax at the corporate level. The corporate form, however, gives shareholders of an S corporation limited liability for debts and wrongdoing of the corporation. This protection is the same as the government provides shareholders of other types of corporations.

3. Limited Liability Company (LLC). An LLC is a hybrid organization with attributes of a partnership and a corporation. The structure of an LLC combines the characteristics of a partnership for tax purposes and those of a corporation for liability purposes. It is an unincorporated association, organized under state law. Usually, it has two or more members, but it can have only one. Members can be virtually any entity including individuals (residents or foreigners), corporations, other LLCs, trusts, pension plans etc. Unlike an S corporation, there are no US citizenship requirements for members, and no limits on the number of members. Unlike in a limited partnership, all members of an LLC may participate in management without risking loss of limited liability. LLC members are not liable to creditors beyond their agreed upon capital contribution. Like a partnership, an LLC is a "pass through" entity for tax purposes. However, under some situations the tax result can be better with the LLC form. This is because in some situations, all members of an LLC, despite lack of personal liability, may receive "tax basis" for LLC liabilities.

In an LLC, the owners are called members as opposed to shareholders. An LLC may designate one or more "managers" to operate its business, or it may choose to operate under the direction of its members.

Limited Liability Companies are formed by filing a form, usually called the “Articles of Organization,” with the Secretary of State's Corporations Division. Most states require an annual report be filed to keep them apprised of current status, but other than that, there are no other ongoing reports or forms. In addition, most states require that the LLC have an “Operating Agreement” of some kind, and a written, carefully drafted one is the prudent practice. The operating agreement is the agreement between the members as to how the LLC will be managed and contains provisions that will qualify it for the beneficial and coveted partnership tax treatment. If not drafted correctly, the LLC will not qualify and will be taxed as a corporation. The state statutes are basically classified as bulletproof or flexible. Bulletproof statutes require that the operating agreement have certain provisions that guarantee that the LLC will qualify for partnership taxation. Flexible statutes leave the drafting of operating agreement provisions up to the individual organizers.

The general rule is that the members will manage the business of the LLC, with the members voting in proportion to their share of current profits. However, the articles of organization may provide that the business of the LLC is to be managed by the manager, managers or a class of managers. Additionally, the operating agreement, similar to the by-laws of a "C" corporation, may provide that the voting rights may be vested only in certain classes of members - i.e., there may be nonvoting members. The manger may, but does not have to, be a member of the LLC. The manager can be an individual, a corporation, a partnership or another LLC. It is important to note that if the LLC is to be managed by a manager or managers, a provision to that effect must be included in the articles of organization.

A primary advantage of the LLC is its tax flexibility - the members of the LLC are allowed to select how the entity will be taxed. Most LLCs select to be taxed as a partnerships. If so, the LLC will not be a tax-paying entity. Profits, losses etc. will flow directly through and be reported on the individual members tax returns. The LLC will file a partnership return under Subchapter K of the Internal Revenue Code. This means that the LLC is treated as a pass-through entity, paying no separate entity level tax. On the other hand, the LLC could elect to be taxed as a corporation by completing IRS Form 8832. If this election is made, the LLC would pay a separate entity level tax. This choice may be advantageous if the LLC owners want to retain profits in the business and would prefer to have these retained earnings taxed at the corporate income tax rate as opposed to the personal rate.

4. Partnership. The partnership form encompasses a variety of business associations, such as joint ventures and syndicates. A partnership is essentially an association of two or more persons, including individuals, corporations or other legal entities, that operate as co-owners for profit. The rights and duties of partners are generally determined by agreement among the partners and state law. These rights and duties are often set forth in a partnership agreement. Although each state has its own partnership laws governing the organization and termination of a partnership, substantial uniformity of partnership laws exists among the states.

Partnerships come in two basic types -- general and limited. A general partnership is a business owned and operated by two or more individuals. A limited partnership is a partnership formed by two or more persons, with one or more general partners and one or more limited partners. In a general partnership, the most common form of partnership, all partners are jointly and severally liable for all partnership liabilities and debts. Unless otherwise stated in the partnership agreement, general partners share equally in profits and losses, participate in management, have the right to refuse new partners and may enter into contracts binding the partnership. The partnership structure is frequently used by such professional service organizations as accounting firms and law firms. Unlike a limited partnership, however, no magic words are necessary to form a general partnership. In addition, the state requires no formal registration documents to form a general partnership as it does for a limited partnership. Although highly desirable, having a written agreement is not necessary to have a general partnership. General partners are liable on all debts of the partnership and for wrongdoing of other partners. A judgement creditor must first look to the assets of the partnership. The individual partner’s assets are at risk if the partnership cannot pay.

In a limited partnership, limited partners cannot participate in management activities, but have limited liability. They are liable only to the extent of any unpaid capital contributions. Limited partnerships, unlike general partnerships, are subject to strict rules concerning their formation and limit the active participation of limited partners. These partners are prohibited from actively participating in the management and operation of the partnership. Failure to comply with these rules may cause the limited partners to be subject to the same liability as the general partners. Limited partnerships are frequently used to structure US real estate investments.

“Pass-through” tax treatment is an important attribute of the partnership form. Generally, the partnership entity is not subject to taxation. Partnerships pass profits and losses separately to partners for tax purposes. Unlike a corporation, a partnership generally is not considered a separate legal entity for all purposes. Depending on the partnership agreement, its existence may terminate on the death or departure of any of its partners or on the occurrence of certain stated events.

5. Sole proprietorship. A sole proprietorship is a business owned and operated by a single individual. Generally, this is the simplest -- not necessarily the best -- form for a single individual to conduct a business. This entity can generally begin life with a checking account and a business plan. It is not a separate legal entity from its owner. An individual directly owns the assets of the business so that there is no shifting of any assets from one individual to another individual or entity. Net income or losses of the business flow to the owner for tax purposes. The owner remains personally liable for all debts of the business.

In general, few formalities need to be satisfied to operate a sole proprietorship, except that the conduct of certain types of businesses requires state or local licenses or permits. If the business is conducted under a trade name, state law may require that the trade name and that of the sole proprietor be registered with the state.

Currently, US citizens and resident aliens (as defined by statute) are subject to US income tax at a maximum effective rate of 39.6% on their worldwide taxable income. Subject to various limitations, a foreign tax credit to offset federal tax is available for income taxes paid or accrued to foreign countries.

Foreign individuals are taxed by the United States at a maximum effective rate of 39.6% on their taxable income effectively connected with a US trade or business, including gains on dispositions of US real estate. They are also taxable at a 30% rate on their US-source income that is not effectively connected with a U.S. trade or business, such as interest, dividends and royalties. Statutory exemptions may be available for interest on bank deposits and portfolio debt obligations.

Choose the Form that Fits Best

The best legal entity for your business depends on the type of business, your goals, and the goals of your investors, employees and others. An attorney selects the best business form by strategically evaluating all available options. Consideration of the present needs and future expectations of the business and its stakeholders is paramount.

There is a broad range of tax and non-tax related issues that can affect the choice, some of which were already discussed above. The list below includes some of the other issues. This list is not comprehensive; it only introduces the kinds of issues involved in choosing the most appropriate form.

How long will the business activity go on? Generally, the corporate entity has perpetual life. In contrast, a partnership can exist for as long or as short a period as the partners need it to. Two independent software developers might use a partnership to jointly develop a computer program. They can go their separate ways when the short-term project is completed.

How will the profits (and losses) of the business be handled? Generally, the sole proprietorship, partnership, S corporation and LLC are not taxable entities. These entities pass the amount and character of profits and losses from the entity's business activities through to owners. These "pass-through" tax benefits could be very important to owners. However, these "pass-through" vehicles can yield very different tax results and are not equal.

How will you compensate employees? Will there be incentive plans to attract and retain talent? Will there be fringe benefits (e.g., health and life insurance plans) for employees and owners? Stock bonus plans, options, warrants and other forms of incentive compensation are available in the corporate form. In addition, if the plans are nondiscriminatory, the C corporation can deduct health and life insurance premiums and provide tax-free fringe benefits to employees. The opportunities for incentive plans and tax free benefits may make the C corporation an attractive option. This might especially be true for the high tech or growth company. These companies must recruit and retain highly skilled employees.

How will you finance the business? The choice of business entity will affect how your business can get money to operate and grow. A sole proprietorship must rely on the individual proprietor’s funds and loans from others. Partnerships and LLCs are financed with contributions and loans from partners or members and others. Corporations can issue stock to shareholders and raise money though bonds and other debt instruments. In particular, your choice of entity will be critical in the event your business becomes a candidate to "go public." "Going public" occurs when a company sells registered shares of stock to the public. In such a case, the C corporation may be attractive, because of its flexible capital structure and ability to accumulate earnings, at lower tax rates, for the reasonable needs of the business.

Do you need limited liability? The ability to limit the extent that one is liable for debts and actions of the business may be important. Limited liability may be the best known characteristic of a corporation. The feature is also available in a limited partnership and LLC. Unlike a limited partnership, however, LLCs offer limited liability to all members. This feature may make the LLC attractive to a business where all members want to fully participate in business decisions. As a practical matter, many small businesses cannot get loans without the personal guarantees of the owners. In addition, an owner can sometimes use insurance as protection against tort -- but not creditor -- liability risks.

Doing business in multiple states? In most cases, an entity (e.g., a corporation, limited partnership) formed under the laws of one state will be recognized by all other states and may become qualified to conduct business in another state by making relatively simple filings in each of the other states where it desires to operate. For example, a corporation formed under the laws of the state of Delaware and desiring to open a plant or office in the state of New York may apply for and obtain authority to transact business in the state of New York . The Delaware corporation would simply file, with the New York Secretary of State, a required application for a certificate of authority, accompanied by a copy of its certificate of incorporation certified by the Secretary of State of Delaware. Upon receipt of the Certificate of Authority from the New York Secretary of State, the Delaware corporation would be entitled to operate in New York to the same extent as a New York domestic corporation.

Why Start A Business In the United States ?
Foreign Corporations, Foreign Companies, and Foreign Individuals can take advantage of the very simple and straightforward process of owning a business entity in the United States . Once a business entity is formed in the United States , there no obligation to actually conduct business. In other words, the business entity can stay idle with no transactions whatsoever.

1. Secure and Stable bank accounts. A foreign individual can maintain a bank account in the United States under the business entity’s name. A foreign individual can create a Corporation in the United States and transfer money to the Corporation in which he is the sole stockholder. When the money is transferred, it is protected by United States financial laws and the United States dollar does not fluctuate as much as most currencies around the world. Also, the money transferred into an American bank is not taxed by the United States tax authorities. Moreover, that money in the US bank account can easily be invested into US equities, bonds, or other types of funds. Therefore, the foreign individual protects his money in a US bank along with reducing currency fluctuations.

2. Immigrating to the US . Foreign individuals can create a US business entity or subsidiaries and eventually use that business entity as a conduit in order to transfer themselves (and their families) temporarily or permanently to the US through the E visa or L visa. Often, foreign businessmen create a US company even when they are only considering immigrating to US. We assist our clients in creating a business entity and then submitting the application packet for an E or L visa to the Immigration and Naturalization Service (“INS”).

3. Global Presence. Foreigners can increase the status of their companies by genuinely stating that they have a company or a corporation in the United States even if there is no business being conducted in the United States . This adds an international benefit and a global presence to many small businesses around the world.

4. Visiting the US . Owning a company in the US , even though no business is conducted in the US , is a positive factor when the US consulate in considering issuing a B-1 Business Visa. Since the consular officer, who considers the application for the B-1 visa, needs to believe that business is the foreigner’s legitimate purpose for his trip to the US , ownership of a US company provides some proof of the intent for potential business within the US . Once again, a foreigner can create the US company while never leaving his own country.

5. Anonymous Bank Accounts. Privacy for many businessmen is essential, and in some States, such as Delaware , a foreign individual or company can anonymously create a company and transact business through that company’s name. The amount of information required in order to create a business entity is minimal, and anonymously creating a company is a legally accepted process in Delaware . Once again, taxes do not need to be paid on the money transferred to a company’s bank account.

6. Profit of the Business Entity. The value of a company grows with time. Once a company is created in the US , it can be sold to another owner. Often, foreigners create US companies and then sell the companies (which have no assets or bank accounts) to other foreigners for a profit. For example, an attorney in Delaware was paid to create 50 Delaware Companies by a Russian firm. This firm then sold the already established companies to individuals in Russia for a profit.

7. US Companies can be Created Quickly and Efficiently. Each and every State government within the US wants companies to be created in their State. Therefore, the States try to make the process not complicated and relatively inexpensive. The foreign individual never needs to visit or come to the US in order create a business entity. Through our offices, we can provide the service of creating a business entity for any individual or company around the world.

8. Where to create a Business Entity. Unfortunately, the rules of creating business entities vary among the different States. There are no companies created by federal law; each company must choose a State in America in which they are officially created. For example, although Microsoft does business throughout the US and internationally, it is technically created in the State of Delaware . Delaware is a State in which many companies are created (60% of all fortune 500 companies incorporate in Delaware ); and therefore, we have provided a list of some of specific benefits of incorporating in Delaware .

Specific Benefits for incorporating in Delaware:

1. There is no requirement for any person involved with a Delaware corporation to live in Delaware (the corporation may pay someone or some company a small fee in order to receive mail on behalf of the company)

2. A company can incorporate anonymously in Delaware if desired.

3. A company can incorporate easily from any country by phone or mail without visiting the State of Delaware .

4. There are no State income taxes applicable to Delaware corporations which do not operate within the State.

5. There is no obligation to transact business, keep a bank account, or even visit the State of Delaware .

6. There is no Delaware inheritance tax on stock held by non-residents of Delaware .

7. Directors may fix any price on shares of stock they wish to sell.

8. If a Delaware corporation does not do business in Delaware , the Corporation is charged only $50 per year.

9. If, our client needs to create a US company quickly, with the proper information, we can create a company in Delaware within one week.

10. One person, or corporation, can hold all corporate offices and can be the sole director. In other words, a single individual anywhere in the world may create a company in Delaware without ever coming to the US .

11. The cost to incorporate in Delaware is one of the lowest in the country.

12. Delaware maintains a separate corporate law court system, called the Delaware Court of Chancery, that does not use juries, but only uses judges appointed for their knowledge of corporate law.

13. Shareholders, directors, and officers of the corporation need not be residents of Delaware .

Conclusion

It is wise to evaluate all options before choosing a business form. Some can be eliminated quickly because of an overwhelming factor. Once the choices are narrowed, most businesses consult with their attorney or tax advisor to insure the correct entity is chosen and proper formation ensues.

SUMMARY - CHOICE OF ENTITIES

1. Corporation:

Advantages:
• Liability of owners/shareholders limited to amount invested
• Ownership is easily transferable
• Continuous existence
• Easier access to capital
• Centralization of management
Disadvantages:
• May be more expensive to organize
• More extensive record keeping required
• Corporate profits may be subject to double taxation

2. Limited Liability Company:
Advantages:
• Easy to form
• Broader management base
• Member liability limited to personal investment
Disadvantages:
• Complex tax filing system
• Tax and liability treatment of a LLC is not uniform across state lines
• Restricted transfer of ownership

3. General Partnership:
Advantages:
• Few legal requirements
• Partners can pool their resources and talents
• No partnership taxes--partners are individually responsible for taxes on their personal income tax returns
• Profits and losses may be divided among partners in the manner they choose
Disadvantages:
• Every partner has unlimited liability
• Personal assets of any of the partners can be used to cover the business's liabilities, regardless of which partner incurred the liability

4. Limited Partnership:
Advantages:
• Limited partner's risk is directly proportional to capital invested
• Investment by limited partners is a potential source of venture capital
• No management responsibility for limited partners
• General partner can increase the business's financial resources and keep personal control of the business without incurring long term debt
Disadvantages:
• General partners remain personally responsible for all liabilities and debts of business
• Lack of management voice for limited partners
• Divided authority if more than one general partner

5. Sole Proprietorship
Advantages:
• Easiest type of business to form
• Decision making process is in direct hands of owner
• All profits and losses of the business are reported directly to owner's income tax return
• Lower start-up costs
Disadvantages:
• Owner has unlimited liability
• Lack of continuity upon owner's death
• Difficult to raise capital
• Owner could spend unlimited amount of time responding to business needs

PLEASE NOTE:
The information contained in this article is for general information only and should not be acted upon without professional advice.