• The degree to which your personal assets are protected from liabilities arising from the business;
  

• How to best pursue tax advantages for maximizing the tax benefits of start-up losses, avoiding multiple layers of taxation, and converting ordinary income to long-term capital gain;
  

• Attractiveness to potential investors and creditors;
  

• The ability to offer ownership interests to attract employees; and
  

• The costs and ease of forming and operating the business entity.

Limited liability for owners?

• Sole Proprietorship: No. The owner has unlimited liability for debts and obligations of his business.

• Partnership: There are two types of partnerships: general partnerships and limited partnerships. In general partnerships, all partners have the right to participate in the management of the business and have unlimited liability for the partnership debts. Limited partnerships have one or more general partners and one or more limited partners. Limited partners enjoy limited liability, but cannot be involved in the active management of the partnership without losing limited liability.

• C Corporation: Yes. Owners, known as shareholders, enjoy limited liability. That is, their liability is limited to their capital investment in the corporation, but their personal assets are not at risk for the debts and obligations of the business.

• S Corporation: Yes. Same as C corporation.

• Limited Liability Company: Yes. Owners, known as members, enjoy the same limited liability as shareholders in a corporation.

• Sole Proprietorship: Yes. There is no legal distinction between the owner and the business for tax or liability purposes. Therefore, all income taxes are paid by the owner on his personal income tax return. The sole proprietorship does not pay income tax as an entity.

• Partnership: Yes. Partnerships are pass-through entities. Each partner reports business profits or losses on his personal tax return in proportion to his percentage interest in the partnership. The partnership, as an entity, does not pay income taxes.

• C Corporation: No. A C corporation is a taxable entity separate from its owners/shareholders. The C corporation files income tax returns and pays taxes as an entity on its profits. Profits and losses do not pass through to the shareholders. Payments made to shareholder-employees, however, reduce the corporation’s taxable income and are reportable by the shareholders as income on their personal tax returns.

• S Corporation: Yes. An S corporation is not taxed federally at the entity level. Profits and losses pass through to S corporation shareholders, who report such profits or losses on their individual tax returns in an amount proportionate to their respective ownership interests. For example, one who owns 25% of the corporation will report and pay taxes individually on 25% of the corporation's profits. State income or franchise tax may still be payable.

• Limited Liability Company: Yes. An LLC’s profits and losses pass through the LLC to its owners/members in the same manner as partnerships. State franchise taxes may still be payable. In California, all LLC’s are also subject to a gross receipts fee on their annual gross income from all sources.

• Sole Proprietorship: No. The owner of a sole proprietorship has no separately existing business entity. Thus, if the owner dies, the sole proprietorship terminates.

• Partnership:  Possibly. A partnership will dissolve upon a partner’s withdrawal, incapacity, or death, unless there is a continuation provision in a written partnership agreement.

• C Corporation: Yes. Once formed, a corporation continues in existence until it is formally terminated (dissolved). This is a corporation’s distinguishing characteristic of perpetual existence.

• S Corporation: Yes. Same as C corporation.

• Limited Liability Company: Possibly. Although the law will differ from state to state, an LLC is usually treated like a partnership in this respect.

• Sole Proprietorship: No. The tax year of the business must generally be the same as the individual, a calendar year ending December 31.

• Partnership: No. As a pass-through entity, the tax year must generally be a calendar year unless prior approval is obtained from the IRS for specific business reasons.

• C Corporation: Yes. A C corporation may choose any fiscal year end, that is, the last day of any month of the year, as its accounting year end.

• S Corporation: No. An S corporation must be a calendar year corporation, unless prior approval is obtained from the IRS for specific business reasons.

• Limited Liability Company: No. Same as a partnership if taxed as a partnership.

• Sole Proprietorship: No. Since the sole proprietor is the sole owner of his business, he cannot transfer an interest in his business – unless the entire business is sold.

• Partnership: No. A partnership interest may be transferable (because it is a discrete asset, unlike a sole proprietorship).  Customarily, however, transfers of the partnership interest are restricted under the terms of a Partnership Agreement.

• C Corporation: Yes. Shares of stock are freely transferable, limited only by securities laws or by restrictions in the corporation’s bylaws. Shareholders may, however, enter into a written agreement placing restrictions on the free transferability of the corporation’s shares.

• S Corporation: Yes. Same as C corporation, with the additional restriction that transfers are limited to persons and entities that qualify as S corporation shareholders.

• Limited Liability Company: No. Interests are transferable, but unanimous or majority consent of the nontransferring members is usually required under state law or the LLC’s Operating Agreement. Additionally, restrictions in an Operating Agreement may allow the transfer of an economic interest only, that is, the right to receive profits and distributions, but not the right to vote or participate in the management of the business.

• Sole Proprietorship: Yes. Other than filing a D.B.A., trade name or "assumed name" statement (if necessary) and obtaining a business license (if required), an entrepreneur may form a sole proprietorship simply by conducting business.

• Partnership: Yes. Same as sole proprietorship, with the recommendation that the partners should enter into a written partnership agreement specifically addressing major issues such as the management of the business, transferability of interests, requirements to invest additional capital, if needed, and events causing dissolution.
  
  In a limited partnership, it is essential to have a written limited partnership agreement covering the same major issues as discussed above for general partnerships. It is also generally required to file a certificate of limited partnership or similar document with the Secretary of State or equivalent state governmental agency to perfect the formation of a limited partnership.

• C Corporation: No. Articles of Incorporation must be filed with the state, bylaws need to be drafted, stock needs to be issued, a corporate bank account must be opened, tax filings must be made, and generally a form listing the corporation’s directors and officers needs to be filed with the state. 

• S Corporation: No. Same as C corporation, with the addition that a written subchapter S election form must be filed with the IRS within approximately 75 days of incorporation. Some states require an S election filing to be made with the state as well.

• Limited Liability Company: Formation is very similar to a partnership, though an initial filing with the state is required to create an LLC. Unless there is only one member, it is generally necessary to enter into a written Operating Agreement covering many of the same topics as listed above for partnerships.

• Sole Proprietorship: No. Short of selling his entire business, an owner cannot sell shares or portions of his sole proprietorship to investors. Raising capital is limited to personal contributions and debt financing (loans), requiring the owner’s personal collateral.

• Partnership: No. In a general partnership, there may be specific restrictions on admitting additional partners who would invest additional capital into the partnership for a percentage of the business. Also, it is very difficult to find third party investors who are willing to be subjected to unlimited liability as partners. With debt financing as the common method of raising capital, the partners will have personal liability for the repayment of any loans.

• C Corporation: Yes. Corporations may raise capital by selling shares to investors. The shares offered may be of various classes (with different financial provisions, for example). Also, a C corporation has no limitation on the number or type of its shareholders, though permission is generally required from federal and/or state securities regulators when the number of shareholders exceeds a specified amount, is accompanied by advertising, or contains other factors not permitted to receive an exemption from approval of a stock offereing. Subject to applicable securities laws, shares may be offered to the public at large, maximizing the potential access to capital.
  
  Additionally, a corporation may obtain loans, if it has sufficient credit history. In any event, shareholders should expect to be required to sign personal guarantees for certain types of transactions entered into in the corporation’s name, such as bank loans, office leases and major equipment leases.

• S Corporation: Yes, although in a more limited capacity than a C corporation. First, transfers of shares are restricted to persons and entities that qualify as S corporation shareholders. Second, an S corporation may have no more than 75 shareholders.  Third, an S corporation may offer only one class of stock (though differing voting rights are allowed).

• Limited Liability Company: No. Same as partnership.

• Sole Proprietorship: No. A sole proprietorship may engage in any legally permitted business.

• Partnership: No. Same as sole proprietorship.

• C Corporation: Limited. The law varies, but some states have special provisions relating to the formation of banking, insurance, and other special businesses as corporations. 

• S Corporation: Same as C corporation. 

• Limited Liability Company: Yes. Same as C corporation. Additionally, some states have limitations or restrictions on the types of businesses that may operate as an LLC. In California, persons engaged in most occupations that are licensed by the state are prohibited from operating a business as an LLC. Common examples include real estate agents and brokers, insurance agents and building contractors, as well as all professions that are required to incorporate a professional corporations.

• Sole Proprietorship: Yes. Like the name implies, this entity may have only one owner. However, a husband and wife team may own and operate a sole proprietorship.

• Partnership: Yes. A general partnership must have at least two partners. A limited partnership must have at least one general partner and one limited partner.

• C Corporation: No. Most states allow one-person corporations; some require at least two shareholder/owners. There is no maximum number of owners of a C corporation, though federal and state securities laws require approval before issuing shares to more than a specified number of shareholders.

• S Corporation: Yes. Same as C corporation, plus an S corporation must limit its shareholders to 75 or fewer.

• Limited Liability Company: Generally, no. Almost every state now permits single member LLC's.

• Sole Proprietorship: The sole proprietor makes all decisions.

• Partnership: In a general partnership, the partners make all decisions, though the partnership agreement may specify different managerial control among the partners.
  
  In a limited partnership, only the general partner(s) make managerial decisions (limited partners do not participate in management).

• C Corporation: The board of directors (elected sannually by the shareholders) manages the corporation.  Shareholders, unless acting as directors, typically do not participate in active management of the corporation.

• S Corporation: Same as C corporation.

• Limited Liability Company: Typically, the members manage the LLC. However, the members may elect or appoint one or more managers to smanage the LLC. Thus, an LLC is referred to as either “manager-managed” or “member-managed.” With a manager-managed LLC in particular, it is essential to have a written operating agreement that clearly describes the rights and limitations of the manager(s) and the circumstances in which approval of the members is required.