Utah Business Structures: 5 Entity Types Explained
Why does the business entity type you use matter?
Choosing the right business entity is one key to a successful business start-up. The right business entity will positively impact a business from an operational, tax, and financial standpoint. A brief meeting with a CPA and business attorney can ensure the business entity you ultimately choose is structured correctly from the start. As a company grows, it can convert to a new business entity when it makes sense. In other words, entrepreneurial ventures can grow into more sophisticated business entity types as they mature.
The following are common business entity classifications and highlight unique aspects between each:
C Corporations
See the IRS info page here.
C-Corps are independent legal and tax entities separate from their owners, aka the corporate veil. This helps separate the shareholders’ personal assets from the business debts. There are no limits to the number of shareholders. C-Corps are taxed on corporate profits and shareholder dividends. A C-corp must hold annual board of directors and shareholder meetings. At these meetings, minutes must be kept and recorded. C-corporations are managed by a board of directors, who then appoint a chief executive officer, who then manages the company. Board of directors, in turn, are elected, or removed, by shareholders at the annual shareholder meeting. The corporate document governing how the C-corp operates is called “bylaws.” C-corporations issue stock to the shareholders. Multiple classes of shares may be issued.
Limited Liability Companies (LLCs)
See the IRS info page here.
LLCs are also independent legal entities separate from their owners, aka the corporate veil. This helps separate the owners’ personal assets from the business debts. The IRS considers LLCs to be “pass-through” entities. In other words, an LLC is taxed similarly to a sole proprietorship (if one owner) or a partnership (if multiple owners). There are no limits to the number of owners in an LLC. LLCs may, but are not required to, hold annual meetings or record minutes. The corporate document governing how the LLC operates is called an “operating agreement.” The owners of an LLC may manage the LLC or appoint a third party to be a manager. LLCs can elect to be taxed as an S-Corporation by submitting IRS Form 2553.
Partnerships
See the IRS info page here.
Partners in a partnership remain personally liable for lawsuits filed against the business, including the liability for the actions of other partners. This level of joint and several liabilities for another person’s actions should be weighed soberly before venturing into a partnership. While partnerships may be registered, usually, no state filing is required to form a partnership. Partnerships between two or more individuals can also be legally inferred based upon actions demonstrating an intent to form a partnership. Partnerships are informal and easy to form and operate. Partners report their share of profit and loss in the partnership on their personal tax returns.
S Corporations
See the IRS info page here.
S-Corps are independent legal and tax entities separate from their shareholders, aka the corporate veil. This helps to separate the shareholders’ personal assets from the business debts. Unlike C-corporations, shareholders report their share of profit and loss in the company on their personal tax returns. The number of shareholders permitted in an S-Corp is limited to 100 or fewer. Shareholders of an S-Corp must be U.S. citizens or residents. An S-Corp must hold annual board of directors and shareholder meetings. At these meetings, minutes must be kept and recorded. S-corps are managed by a board of directors, who then appoint a chief executive officer, who then manages the company. Board of directors, in turn, are elected, or removed, by shareholders at the annual shareholder meeting. The corporate document governing how the S-Corp operates is called “bylaws.” S-Corps issue stock to the shareholders. S-Corps may only issue a single class of stock.
Sole Proprietorships
See the IRS info page here.
Sole proprietor owners remain personally liable for lawsuits filed against the business. This level of personal liability should be given sober thought before venturing into a partnership. While a sole proprietor can be registered, usually, no state filing is required to form a sole proprietorship. Sole proprietorships are easy to form and operate. Owners report business profits and losses on their personal tax return.
Johnstun Law can help you with all your business needs, including choosing the right business entity. Learn more about what we can do for your business here.
Important: This material was prepared by law firm staff for educational purposes only. Use this to spot issues to discuss with your lawyer, not as a replacement for a lawyer. You should not rely on this info. It may not be appropriate for your circumstances. It may be out-of-date or otherwise inaccurate.
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