There are many different types of business entities that a new business (or an existing business seeking to reorganize) can choose from in Indiana. This article discusses each, how they form, and some basic pros and cons of each.
• Sole proprietorship – This business type consists of a single owner. It does not require any filing with the state to form. The income of the business is reported as part of the owner’s personal income, and the owner assumes personal liability for all debts and liabilities of the business.
• General Partnership – This business type also does not require any filing with the state to form. A general partnership may have any number of partners (with a minimum of two) who are co-owners of the business. Profits are reported as part of the owners’ personal income as distributed among the partnership agreement (or equally distributed if there is no agreement). All partners are fully responsible for the debts and liabilities of the partnership.
• C-Corporation – This is a legal entity formed by filing Articles of Incorporation with the state. The corporation itself is liable for the debts and liabilities of the company, and the owners are only at risk for the amount they have contributed to the corporation. Owners are shareholders who own shares in the corporation. Income is taxed as corporate income and then taxed again as income of the shareholder when dividends are distributed.
• S-Corporation – This is a legal entity formed by filing Articles of Incorporation with the state. The specific S-Corporation designation is selected when filing with the IRS. The corporation itself is liable for all debts and liabilities, but profits are only taxed once they are distributed to shareholders. An S-Corporation in Indiana is limited in more ways than a C-Corporation, including in its number of shareholders and types of shareholders.
• Limited Liability Company (LLC) – An LLC is a legal entity formed by filing an organizational document with the state. An LLC has members rather than shareholders, but it has the limited liability features of a corporation. Profits may pass through the LLC and only be taxed as income of the members.
• Nonprofit Corporation – A nonprofit corporation is a legal entity formed by filing Articles of Incorporation with the state. A nonprofit corporation does not operate in order to make a profit for its shareholders. A nonprofit must gain tax exempt status from the IRS and the Indiana Department of Revenue.
• Benefit Corporation – A benefit corporation is a legal entity formed by filing Articles of Incorporation with the state. A benefit corporation is identical in structure to a C-corporation, but it comes with the added requirements of reporting social benefits each year as well as profits. This means that, unlike C-Corporations, benefit corporations are generally judged by shareholders on more than just profitability.
• Limited Partnership – A limited partnership is a legal entity formed by filing organizational documents with the state. A limited partnership must have at least one general partner, who is fully responsible for the debts and liabilities of the partnership, and at least one limited partner, whose liability is limited to the amount of their investment. The income is taxed once as part of the partners’ personal income.
• Limited Liability Partnership (LLP) – An LLP is a legal entity formed by filing organizational documents with the state. An LLP operates similar to a general partnership, but the partners enjoy limited liability from the debts and liabilities of the partnership. Profits are taxed as part of the partners’ personal incomes.
Each of these business types has other legal requirements, but this is a basic overview of their relative pros and cons. The business law professionals at McNeelyLaw LLP are willing and able to assist you in setting up any of these business entities and in meeting all the legal requirements inherent in each.