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Business Entities Compared

Choosing the right entity is one of the first and most important decisions. Most owners fail to think it through — choose one that offers tax benefits and personal asset protection.

The Recommendation

For building corporate credit, the author strongly recommends a C-Corporation. Here's why:

  • SPs, GPs, and LPs are extensions of their owners — Social Security numbers are always used for financing
  • LLCs suffer from "charging orders" — creditors always require personal guarantees, making corporate credit virtually impossible
  • C-Corps provide the image of a larger corporation, and the highest D&B ratings are reserved for larger corporations
  • Only C-Corps can go public (IPO)

Sole Proprietorship (SP)

Not Recommended

Advantages

  • Easiest to form — business license + DBA
  • Pass-through tax treatment
  • Few formalities

Disadvantages

  • No personal asset protection
  • No continuity after death
  • Hard to attract investors
  • Taxed at higher personal rate
  • Hard to sell

General Partnership (GP)

Not Recommended

Advantages

  • Easy to form
  • Pass-through tax
  • Few formalities

Disadvantages

  • Unlimited personal liability
  • Each partner liable for others' actions
  • No continuity
  • Can't raise capital via stock
  • Hard to sell

Limited Partnership (LP)

Not Recommended

Advantages

  • Limited partners have limited liability
  • Pass-through tax
  • Can attract investors
  • Good for estate planning

Disadvantages

  • General partner has unlimited liability
  • Limited partners can't manage
  • Taxed at personal rate

LLC

Not Recommended

Advantages

  • Less formalities than corps
  • Pass-through or corporate tax option
  • Charging orders protect assets
  • No ownership limits

Disadvantages

  • Charging orders prevent corporate credit without PG
  • Can't go public (must be C-Corp for IPO)
  • Can dissolve if member leaves
  • Can lose pass-through tax if formalities not followed

C-Corporation

✓ Recommended

Advantages

  • Most flexibility + limited liability (corporate veil)
  • Unlimited shareholders, any type, worldwide
  • Numerous tax benefits
  • Can retain earnings or defer to retirement
  • Easy ownership transfer
  • Can go public (IPO)
  • Best entity for building corporate credit

Disadvantages

  • Double taxation (profits + dividends)
  • Many formalities required
  • Corporate veil can be pierced if formalities not followed

S-Corporation

Not Recommended

Advantages

  • Pass-through tax (no double taxation)
  • Limited liability
  • Can own subsidiaries

Disadvantages

  • Max 75 shareholders
  • Domestic only, no non-resident aliens
  • One class of stock only
  • Full disclosure of owners required
  • Same formalities as C-Corp

Close Corporation

Not Recommended

Advantages

  • Fewer formalities (35 shareholders or less)
  • Can govern by shareholder resolution

Disadvantages

  • IRS often disregards it as a corporation
  • Treated as partnership for tax/veil piercing
  • Uncertain benefits

Shelf Corporation

Conditional

Advantages

  • Saves time vs. creating new corp
  • Can bid on government contracts
  • Creates appearance of longevity
  • Easier access to credit

Disadvantages

  • Must verify 2-year history, all formalities kept, free of judgments/ liens
  • Many scam artists sell worthless shells

Corporate Chain of Command

Shareholders

Owners of the corporation. Elect the board and vote on major changes. No power in daily decisions.

Board of Directors

Elected by shareholders for one-year terms. Create long/short-term goals and policies. Appoint and remove officers.

Officers

President (carries out board's orders), Treasurer (manages bank accounts, records finances), Secretary (maintains corporate records). Many states allow one person to hold all offices.

Management & Employees

Management hires/fires employees and supervises daily operations. Employees carry out company policies.

Key Corporate Documents

  • Articles of Incorporation — filed with Secretary of State; the corporation's "constitution"
  • Corporate Bylaws — rules governing shareholders, directors, officers (private, not filed)
  • List of Officers & Directors — filed annually with Secretary of State
  • Stock Ledger — record of all stock transactions
  • Stock Certificates — represent shares owned
  • Minutes & Resolutions — records of all meetings and board actions
  • Corporate Records Book — binder holding all the above
Reflect

Which entity structure aligns with your goals? How will you protect personal assets?