Business Structures Advantages and Disadvantages of Common Business Structures

Business Structures Advantages and
Disadvantages of Common Business Structures
A corporate entity structure offers a those forms of entities in which a board of

variety of benefits that are not available in a directors is elected by the shareholders. The
sole proprietorship or general partnership Close Corporation resembles a partnership as it
which include limited liability, perpetual relates to governance matters.
existence and board governance. Despite
the benefit of incorporation, it is oftentimes Advantages:
the case that the additional formalities 1. Limited Liability
together with tax and regulatory 2. Less formality
requirements become a difficult hurdle for the 3. Distinct Legal Entity 4.
owner of a small business. In addition Perpetual Existence
to the corporate structure and general
partnership form of enterprise, the limited Disadvantages:
liability company is becoming a popular 1. Number of shareholders limited
form of doing business in many 2. Restrictions on raising capital
jurisdictions in that it offers several of the 3. Restrictions on transfer and sale
benefits of the traditional corporate form
while being more flexible and easier to
manage in smaller settings. Below you will
find a primer on the various forms of 2. S Corporation
entities that are available in Rhode Island in
which to conduct business. A Subchapter S Corporation is a corporate
form of business in which a special tax
1. Close Corporation status has been elected under the Internal
Revenue Code. Unlike a C Corporation, the
The close corporation is a statutory S Corporation has pass through tax
creature and is one of the variations of a treatment and is therefore not subject to
general corporate structure in which the double taxation. All other corporate
shareholders, directors and officers are attributes of an S Corporation exist,
usually the same individuals and the including limited liability for its
formality of a board of directors is not shareholders. The IRS does not tax the
required. The shareholders typically corporate profits of an S Corporation in that
manage a Close Corporation and the the income of the corporation is taxed
number of shareholders is limited to thirty. directly to the shareholders in accordance
A limitation in using this structure is that with their pro rata interest in the
transfers of stock are generally more outstanding capital shares of the
restricted and this is not the form of entity corporation. The S Corporation is subject to
in which the founders will raise equity. additional limitations that do not apply to a
Most jurisdictions require that shareholders C Corporation. For example, an S
in a Close Corporation must offer their stock Corporation is limited to one hundred (100)
to the other shareholders before shareholders and may only issue one class of
transferring it to a third party. Close stock.
Corporations are much less formal than
Advantages:
1. Single taxation
2. Limited Liability
3. Distinct Legal Entity 4.
Perpetual Existence
Disadvantages:
1. Limited to 100 shareholders
2. One class of stock
3. More difficult to create
3. Limited Liability Company

A relatively new form of business enterprise
is called a limited liability company. The
limited liability company is created by
statute and is similar in treatment to the S
Corporation with fewer restrictions. The
limited liability form of enterprise is not a
corporation; however, it is created in a
similar manner with the filing of articles of
organization. The owners of a limited
liability company are called members and its
management is vested in its members.
The relationship by and among members is
governed by the terms of an operating
agreement and by statute in the absence of
an operating agreement. A limited liability
company does not have a board of
directors.
Advantages:
1. Limited Liability
2. Increased Flexibility
3. Member managed
4. No dual taxation
5. No limit on number of members
6. No ownership restrictions of
corporations
Disadvantages:
The formation of a new business entity

requires the consideration of business, tax and
governance issues in order to achieve the goals of
its owners.
This outline is not a complete analysis and may not

be relied upon as legal advice. Please contact Gary
R. Pannone, Esquire for further consultation at 401-
824-5115 or send an email to him at
[email protected]

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Business Structures Advantages and Disadvantages of Common Business Structures

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Business Structures Advantages and

Disadvantages of Common Business Structures

A corporate entity structure offers a those forms of entities in which a board of

3. Limited Liability Company

The formation of a new business entity

This outline is not a complete analysis and may not

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