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CHOOSING THE BEST LEGAL FORM FOR YOUR BUSINESS

Four preferred legal forms and their respective advantages and disadvantages.
ADOBE ACROBAT FILE Click here. Page 1 (322 KB), Page 2 (118 KB)

Sole Proprietorship
Partnership
Corporation
Subchapter "S" Corporation

These are questions to address in making your selection:

� Do you lack adequate funds, or the particular managerial or technical expertise which a partner may offer?
� How and when will profits be divided?
� What liabilities are you prepared to assume?
� What are the tax implications?

Six Preferred Legal Forms of Business
Descriptions and Advantages

	Sole Proprietorship	Partnership	Corporation	Sub-S Corporation	Limited Liability Partnership	Limited Liability Company
Ownership	By a single individual	By two or more persons	By unlimited number of shareholders	By shareholders: number of shareholders limited to 75	2 or more persons or entities (except law firms)	1 or more persons or entities (except certain providers of professional services and law firms
Business Registration (State Dept. of Commerce and Consumer Affairs)	Not required, unless public notice of trade name is desired	Within 30 days after formation, file certificate of limited or general partnership	File Articles of Incorporation. For non-Hawaii corporations, file Application for Certificate of Authority and Certificate of Good Standing	Same as regular corporation	File certificate of limited liability partnership; for non-Hawaii partnerships, file Application for Registration as Foreign Limited Liability Partnership	File Articles of Organization. For non-Hawaii companies, file Application for Certificate of Authority
Management	Entirely in hands of owner	By general partners	Corporation's board of directors	Same as regular corporation	By general partners	Member-managed, or manager-managed
Life	Will terminate with death or disability of owner	Generally for a specific, agreed-upon term. Partnership may be terminated by death, withdrawal, insolvency, or legal disability of a general partner	Unlimited, unless by state law or charter	Same as regular corporation	Generally for a specific, agreed-upon term. Partnership may be terminated by death, withdrawal, insolvency, or legal disability of a general partner	May be for a specific agreed-upon time, or at will
Liability	Owner liability unlimited. Personal property can be attached by creditors to settle business debts	Unlimited for general partners. General partners are jointly and severally liable for obligations of partnership. Limited partner's liability limited to amount invested	Shareholders' liability limited to their investment in corporation stock	Same as regular corporation	Limited to amount of investment	Limited to amount of investment, or as specified in Articles of Organization
Taxation	Owner taxed on business profits whether or not distributed	Partners taxed on share of partnership income whether or not distributed	Corporation taxed on taxable income, whether or not distributed to shareholders	Shareholders taxed on taxable income of corporation, whether or not distributed	Partners taxed on share of partnership income whether or not distributed	Members taxed on share of company income whether or not distributed
Advantages	Uncomplicated -- ease of information Greater flexibility of action Singleness of control Economy of operation Tax advantage by avoiding corporate income tax Maximum centralized authority	Division of responsibilities Ease of formation Greater flexibility of action Increased sources of capital Incentive to key employees Tax advantage by avoiding corporate income tax	Legal entity separate from individuals Limited personal liability Continuity of existence Continuity of management Easier to raise capital Incentive to key employees Readily transferable interests Possible separation of ownership and management	Legal entity separate from individuals Limited personal liability Continuity of existence Continuity of management Readily transferable interests Possible separation of ownership and management Net operating loss deductible by shareholders	Division of responsibilities Ease of formation Limited personal liability Greater flexibility of action Increased sources of capital Incentive to key employees Tax advantage by avoiding corporate income tax	Legal entity separate from individuals Limited personal liability Continuity of existence Continuity of management Easier to raise capital Incentive to key employees Readily transferable interests Possible separation of ownership and management
Disadvantages	Unlimited personal liability Legal life ends with owner's death Difficulty in raising capital Possible personnel difficulties Owner's salary cannot be treated as expense, hence, not tax deductible	Unlimited personal liability Impermanence of existence Division of control/ authority Difficult to find compatible partners Difficult to raise additional capital Owners' salary/wage cannot be treated as expense, hence, not tax deductible	Difficult, costly formation Subject to close government regulation Scope limited by corporate charter Inflexibility of operations Double taxation by paying both corporate and personal income taxes	Only one class of stock outstanding Difficult, costly formation Subject to close government regulation Inflexibility of operations	Impermanence of existence Division of control/ authority Difficult to find compatible partners Difficult to raise additional capital Owners' salary/wage cannot be treated as expense, hence, not tax deductible	Difficult, costly formation Subject to close government regulation Scope limited by company charter Inflexibility of operations