Earlier this week, we discussed those “default” business structures – sole proprietorships and general partnerships – that are automatically created when a person or persons begin operating a business without forming a limited liability entity.

Although such structures may be attractive in certain limited circumstances, these structures structures don’t generally provide limited liability protection and it is generally advisable to avoid them in favor of using a limited liability entity, especially if the business will have, or already has, employees.

There are three principal considerations when choosing a business structure: (1) liability, (2) management, and (3) taxes.

Although the taxation of business structures is generally governed by federal law, and is fairly consistent throughout the country, it bears repeating that the individual states create most of the laws associated with the limited liability and management of business structures, which results in significant variation from state to state.



  • Managed by corporate officers
  • Limited liability
  • Two levels of taxation

The c-corporation is perhaps the most well-known business structure in the United States, largely because the vast majority of publicly-traded companies, such as those listed in the New York Stock Exchange or NASDAQ, are structured as c-corporations.

Management of a c-corporation is vested in corporate officers, such as a president, vice president, CEO, CIO, CFO, etc. These officers are appointed by a board of directors, which is elected by the shareholders of the corporation.

A shareholder of a c-corporation is generally not liable for the debts of the corporation unless that shareholder has taken actions that would otherwise subject the shareholder to personal liability or has personally guaranteed a debt owed by the corporation.

Though c-corporations provide limited liability, that limited liability may come at a significant cost: double taxation. In particular, the profits of c-corporations are taxed once at the corporation level and then once as dividends at the shareholder level.

Although two levels of taxation may seems like a significant detriment, depending upon the tax brackets of a particular shareholder, the two levels of taxation associated with c-corporations may not require the payment of much additional tax.

While some publicly traded companies are not structured as c-corporations, angel investors and venture capitalists often want businesses in which they invest to be structured as c-corporations if an initial public offering, or IPO, is a possibility.

In case you’re wondering, c-corporations are called c-corporations because they are taxed under Subchapter C of the Internal Revenue Code.



  • Managed by corporate officers, but limited to no more than 100 shareholders
  • Limited liability
  • One level of taxation and potentially lower self-employment taxes

Similar to a c-corporation, management of an s-corporation is vested in the officers of the business, as appointed by a board of directors. The members of the board of directors are elected by the shareholders, as is the case with c-corporations. Shareholders of an s-corporation who are not officers are generally not otherwise authorized to manage the business.

As with a c-corporation, a shareholder of s-corporation stock is generally not liable for the debts of the corporation, unless that shareholder has taken actions that would otherwise subject the shareholder to personal liability or has personally guaranteed a debt owed by the corporation.

Unlike a c-corporation, however, the profits of an s-corporation are not subject to two levels of taxation. Instead, an s-corporation’s profits are only subject to one level of taxation, or “pass-thru” taxation, like unto a sole proprietorship or partnership.

Although s-corporations are treated as pass-thru entities for tax purposes, shareholders of s-corporations that manage the business but do not directly provide services to customers/clients/patients can potentially reduce employment or payroll taxes in some limited circumstances.

As a result of potentially lower payroll taxes, s-corporations are often used to structure businesses that are capital-intensive and may not require the officers of the business to render significant services to, or on behalf of, the business.

The aforementioned benefits of an s-corporation, however, do come at a substantial cost: significant restrictions about who can and who cannot own shares of the corporation, among other things.

Again, in case you’re wondering, s-corporations are called s-corporations because they are taxed under Subchapter S of the Internal Revenue Code.

Limited Liability Company (LLC)


  • Managed by LLC manager(s) or LLC members (Owners)
  • Limited liability
  • Flexible taxation

An LLC is a hybrid entity that can be structured in many different ways. Management can either be vested in one or more managers (like unto officers in a corporation or general partners in a general partnership), or management can be vested in the owners (called “members”) of an LLC (like unto the partners in a general partnership).

Similar to a corporation, the owners of an LLC generally are not personally liable for the debts of the business unless they have taken actions that would otherwise subject them to personal liability or they have personally guaranteed LLC debt(s). In fact, in some jurisdictions, such as Arizona, the limitation of liability associated with LLCs is significantly more creditor unfriendly than the limitation of liability associated with corporations because some state legislatures have prohibited foreclosure upon an LLC member’s interest in an LLC by limiting remedies to charging orders.

Taxation is another aspect of LLCs that allows greater flexibility. In fact, an LLC can be taxed either as a c-corporation, an s-corporation, a partnership, or a sole proprietorship.

As a result of this flexibility, LLCs are used to structure many different types of businesses ranging from real estate investment companies to large automobile manufactures, such as the former Chrysler Group LLC.

Because the business structures listed above are so-called limited liability entities, some clients and prospective clients are shocked when I tell them that business owners are still liable for their personal actions and/or services, even when acting on behalf of the company. Although such liability is most common in personal or professional services, businesses where business owners personally provide services to customers/patients/clients of a business, it can be applicable to other types of businesses as well.

Although the sheer variety of business structures can be a little overwhelming and confusing, this variety can allow a business owner to choose a structure that is very well-suited to specific needs and circumstance.

About the Author(s)

Steve Cook, Cook & Cook

Steve Cook is an attorney at Cook & Cook in the Phoenix, AZ area. He represents individuals, for-profit businesses, and charities in the capacity of outside/concierge general counsel. Steve also has experience as a co-founder of a digital marketing startup that received significant venture capital during his undergraduate studies. Cook & Cook| @sw_cook | More from Steve   

Attorney, Cook & Cook