Business Structures
Please note that this is a simplified summary of the general rules relating to entity choice in Oregon. Because these are general rules, I suggest that you contact an attorney and a tax professional to discuss the specifics of your situation.
Sole Proprietor/No Entity
A sole proprietor is a single natural person who is engaging in business. Sole proprietors may have employees, but there can only be one owner. Assuming the sole proprietor does not use a business name other than the person's legal name, there is no filing required with the Secretary of State, and there are no annual fees payable to the Secretary of State associated with the entity type. A sole proprietor does not have any governing documents. All business related income and expenses are reported directly on the sole proprietor's personal income tax return. Because there is no separate legal entity, all of a sole proprietor's assets can be reached by the sole proprietor's creditors, including any personal assets, such as a residence or personal bank accounts.
General Partnership
A partnership is similar to a sole proprietorship, except there is more than one person owning the business. Each partner is individually liable for the debts of the partnership, regardless of whether the individual partner even knew about the debt. The income and expense of a general partnership pass through to its partners. A partnership can be formed either with or without written documentation. It is unusual to see a General Partnership because of the use of limited liability companies and S Corporations.
Corporation
A corporation is a separate "person" under Oregon law. As such, it has its own debts, for which the owners of the corporation are not usually liable. The shareholders (owners) of a corporation typically elect a board of directors who are responsible for running the corporation. The board of directors, in turn, appoints officers who are responsible for the day to day operations of the corporation. Shareholders, directors, and officers of a corporation are not liable for the debts of the corporation, except in very limited situations.
In order to form a corporation, Articles of Incorporation must be filed with the Secretary of State and a filing fee must be paid. There is an annual renewal fee. A corporation is typically governed by bylaws, which set out the rights of the shareholders and explain the duties of the board of directors and officers. There may also be a buy-sell agreement between the shareholders, which governs under what circumstances a shareholder can sell his/her shares. There is a requirement that the shareholders of a corporation meet at least once per year; however, in lieu of the meeting, a written consent action can be taken.
A small corporation can elect to be an "S" corporation. The difference between a "C" corporation and an "S" corporation is how the entity is taxed. A "C" corporation files a separate tax return and pays its own tax. Then when it distributes dividends to its shareholders, the shareholders are taxed on the dividends. In the case of an "S" corporation, the corporation files a separate tax return, but the gain or loss is passed through to the individual owners on a K-1, and dividends are not taxed.
Limited Liability Company
A limited liability company is a hybrid between a partnership and a corporation. A member managed limited liability company looks much like a general partnership. Each member has the apparent authority to bind the company. A manager managed limited liability company looks more like a corporation. Only the managers have apparent authority to bind the company and the managers run the company with limited input from the members.
Regardless of whether a limited liability company is manager managed or member managed, the profits and losses pass through to each individual member. The limited liability company, in most cases, must file its own tax return, but it does not pay taxes, each individual member pays the taxes on its share of the profit (or receives his/her share of the deduction for the loss) in a very similar manner to the "S" corporation. There are subtle differences in the way that limited liability companies and "S" corporations are taxed. Many of these differences relate to the contribution/sale of appreciated property and the treatment of self-employment income.
To form a limited liability company, Articles of Organization are filed with the Secretary of State, and a filing fee is paid. There is an annual renewal fee. A limited liability company is governed by an operating agreement. Depending on the relationship between the members, this can range from being an extremely simple document to being 50+ pages.
Single Member LLC
A single member LLC is a limited liability company with only one owner. It operates the same as a multi-member limited liability company, except that a single member limited liability company is a disregarded entity for tax purposes. The profits and losses of the limited liability company are reported directly on the owner's tax return and no separate tax return for the limited liability company is required.
This document is a summary of the choices related to type of entity for businesses in Oregon as of March 13, 2007. This document does not create an attorney-client relationship. If you desire more information about entity choice, I invite you to contact me.
Circular 230 Disclaimer: If any portion of this communication is interpreted as providing federal tax advice, Treasury Regulations require that we inform you that we neither intended nor wrote this communication for you to use in avoiding federal tax penalties that the IRS may attempt to impose and that you may not use it for such purpose.
