The owner of a business generally has several different options regarding organization of his or her business.  There are certain advantages and disadvantages to each form of business organization.  It is wise to consult with an business attorney and certified public accountant before making a final decision concerning the form of business organization you will use.  A business attorney can help you to properly form a corporation or organize a limited liability company and explain the steps required to keep the corporation or limited liability company in good legal standing.  There is more to forming a limited liability company or corporation than filing the articles of organization or articles of incorporation.  Below you will find an overview of some different forms of business organization.

The most common forms of business organization are:  (a) the sole proprietorship; (b) the partnership; (c) the corporation; and (d) the limited liability company. Within the category of partnership are the general partnership and the limited partnership.  Within the corporate category there exist several types of corporations.  From the standpoint of federal income tax, there are three principal forms of business entity, which are: (a) the regular Subchapter C corporation; (b) the Subchapter S corporation; and (c) the partnership.  The process of choosing a form of organization can be complicated because federal income tax law does not exactly match state law by establishing separate tax treatment for each organization.


The simplest and oldest form of business organization is the sole proprietorship.  The sole proprietorship has only one owner.  The sole proprietor and his business are one and the same.  The sole proprietorship is a very common form of business organization.  Some of the advantages of a sole proprietorship are:  (a) management decisions are made by the sole owner without interference by other owners; (b) the owner is not subject to business liabilities created by other owners; (c) the individual owner is not required to file any formal document organizing his business with the state, although the owner not using his name in the business must file a trade name registration.  Some of the disadvantages of a sole proprietorship are:  (a) the owner’s ability to borrow money and obtain credit is limited by his own financial resources; (b) when the owner dies, so dies the business; (c) there is unlimited liability of the owner for obligations of the business.  All of the income and deductions generated by the business belong to the sole proprietor and are reported on Schedule C of his annual income tax return.  The net income of the business is added to any other income the sole proprietor receives and is taxed at the owner’s tax rate.


A general partnership is an association of two or more persons to carry on as co-owners a business for profit.  A general partnership has three significant non-tax characteristics, which are: decentralized management, unlimited liability, and no continuity of life.  Unless a written partnership agreement places some or all of the management powers in a designated partner, each partner has an equal voice in the management of the business.  A general partner can create a partnership liability to a third party who does not have knowledge of a limitation in a partnership agreement.  Each partner in a general partnership is personally liable for all of the obligations of the business, including liabilities from the acts of another partner.  Unless a written agreement provides otherwise, the withdrawal, expulsion, or death of a partner causes the dissolution of the partnership.  Some of the advantages of a partnership are:  (a) there is little formality required in the organization and operation of a general partnership; (b) as with sole proprietorships, there is no tax levied for the right to organize or create the partnership; (c) income taxes are charged to and paid by the individual partners rather than by the partnership, as the partnership itself does not pay an income tax; (d) the talents and resources of more than one person can be combined for the business.  Some of the disadvantages of a partnership are:  (a) there exists the possibility of disagreement concerning the operation of the business between or among the partners; (b) with a large number of partners, operation of the business may become more complex; (c) each partner is liable for the acts of other partners taken in connection with the business.  For tax purposes, a partnership is a pass-through entity and does not itself pay income tax.  The partnership return shows partnership profits and the taxable interest of the individual partners.  Each partner is liable in his individual capacity for his allocable share of partnership taxable income, whether or not he actually receives a cash distribution of it.  Partners may be required to pay self-employment taxes and to make quarter-annual estimated tax payments.  Each partner is entitled to his allocable share of any partnership loss.


A limited partnership is a partnership formed in accordance with state law by two or more persons and has one or more general partners and one or more limited partners.  Under Georgia law, a limited partnership cannot be created simply by an agreement between or among persons.  It must be formed in accordance with the “Georgia Revised Uniform Limited Partnership Act.”  Limited partners have different rights and liabilities than general partners.  A limited partner is not liable for the obligations of a limited partnership simply by reason of being a limited partner, although his investment in the partnership is subject to the partnership’s liabilities.  On the other hand, the general partner is liable for all of the obligations of the limited partnership.  Limited partnerships may be useful where there are two types of owners of the business, those who manage the business (i.e., the general partners) and those who only invest in the business (i.e., the limited partners).  The main purpose of a limited partnership is to allow a person to invest in a business (and profit therefrom) without risking more than the capital which he contributes.  In the past, limited partnerships often were used to structure real estate ventures and technological projects.  The limited partnership offers most of the advantages of a general partnership, such as flexibility in management.  Except for the limited liability of the limited partners, the limited partnership has most of the disadvantages of the general partnership.  Limited partnerships generally are taxed in the same way as general partnerships.


A corporation is an entity created under state law which is separate and apart from its owners, the shareholders.  A corporation has the same powers as an individual to do all things necessary or convenient to carry out its business, including the power to sue and be sued, the power to buy and sale property, and the power to make contracts.  Corporations have four basic characteristics, which are:  (i) continuity of life; (ii) limited liability of shareholders; (iii) centralization of management; and (iv) transferability of interest.  Perhaps the most important characteristic of the corporation is the limitation of liability of the shareholders.  As a general rule, a shareholder is not personally liable for the obligations of the corporation unless he agrees to guaranty those obligations.  The shareholder generally cannot lose more than his investment in the corporation.  In this respect, the shareholder is like the limited partner in a limited partnership.  However, certain formalities must be met in the operation of the corporation and disregard of the legal requirements for operation of a corporation may result in the disregard of the corporate entity.  Further, a court may disregard the corporate entity and hold a shareholder liable for a corporate debt where a party “has over extended his privilege in the use of a corporate entity in order to defeat justice, perpetuate fraud or to evade contractual or tort responsibility.”  Amason v. Whitehead, 186 Ga. App. 320, 367 S.E.2d 107, 108 (1988).

There is a distinction between the owners of the corporation and its management.  The shareholders of the corporation elect the directors of the corporation.  The directors of the corporation elect the officers.  The directors of a corporation make policy decisions and long range plans for the corporation.  The officers of the corporation manage it on a day to day basis.  Thus, the management of the corporation is said to be centralized in the officers and directors.  Shares of stock are issued to the owners of the corporation and represent each shareholder’s proportionate interest in the corporation.  The transfer of these shares does not affect the existence of the corporation.  In the absence of an agreement between or among the shareholders, the shareholders generally are free to transfer their shares to others.  The structure of corporations is suitable for businesses of enormous size, as well as one person businesses.

The formation of a corporation is more involved than forming either a sole proprietorship or a simple general partnership.  The out of pocket expenses of forming a corporation generally exceed the formation of other entities.  Fees must be paid to the Secretary of State to form the corporation.  In addition, a publication fee must be paid.  There are numerous formalities which must be followed in the operation of the corporation to preserve the limited liability aspect of the corporation.  Failure to follow the statutory requirements may result in the loss of the immunities and advantages of a corporation.  Public disclosure of corporate information often is required for large and publicly traded corporations.

There are different types of corporations.  Subchapter S of the Internal Revenue Code permits certain small business corporation to elect Subchapter S status.  If the corporation is eligible for Subchapter S status and the election is made by the shareholders to be treated as such, the corporation generally is not subject to an entity level tax, but instead each shareholder must include his share of the corporation’s earnings in his taxable income.  Except for purposes of taxation, the S corporation is nothing more than a regular corporation.  The term “close corporation” refers to corporations whose voting shares are held by a single shareholder or a closely-knit group of shareholders.  In this sense, a corporation can be a close corporation without making any special election under the Georgia Business Corporation Code.  However, the Georgia Business Corporation Code contains an article which permits a corporation to elect close corporation status.  If such election is made, the corporation becomes a statutory close corporation and special default rules apply to the corporation and its shareholders.  Most of the provisions which apply by operation of law to a statutory close corporation also may apply to other corporations either by shareholders’ agreements, the articles of incorporation, or the bylaws of the corporation.  The “Georgia Professional Corporation Act” permits members of certain professions to operate their business in corporate form.  The professions to which this act applies are certified public accountancy, architecture, chiropractic, dentistry, professional engineering, land surveying, law, psychology, medicine and surgery, optometry, osteopathy, podiatry, veterinary medicine, registered professional nursing, or harbor piloting.  A person licensed to practice one of the designated professions may elect to practice as a professional corporation by complying with the Georgia Professional Act.  Under Georgia law, it is possible for a professional corporation to elect to be treated as a statutory close corporation.


A limited liability company (“LLC”) is an entity which is created under state law.  It is best dscribed as a hybrid entity, possessing come of the characteristics of a corporation and some of the characteristics of a partnership.  A limited liability company has the capability of having the limited liability of a corporation for all its owners, who are called “members,” with the pass through tax treatment of a partnership (in the case of a multi-member LLC).  Like a corporation, it is an entity separate and apart from its owners.  A person who is a member, manager, agent, or employee of a limited liability company is not liable for any debt, obligation, or liability of the LLC solely by reason of being a member, manager, agent or employee of the LLC.  Furthermore, a member of a limited liability company is not liable for the acts or omissions of any other member, manager, agent, or employee of the LLC.  The limited liability of the members is the primary non-tax benefit of the LLC.  A multi-person LLC differs from a corporation in that it can be treated like a partnership for federal income tax purposes.  If properly formed, the LLC achieves the investment goals of limited liability (like a corporation) and pass-through tax treatment (as a partnership).  This ability to combine limited liability and partnership tax treatment has made the LLC a popular form of business organization.  An LLC with one owner is treated as a sole proprietorship for tax purposes unless an election is made to treat the entity as a corporation.  A word of caution is in order for one who would form the LLC without the advice of an attorney.  The Georgia Limited Liability Act contains default provisions which apply in the absence of contrary provisions in an operating agreement between or among the members.  These default provisions often do not reflect the intent of the members concerning the ownership and operation of the LLC.  Therefore, while it may be simple to file the articles of organization, failure of the members to enter a written operating agreement causes the members to be subject to statutory default rules which may be contrary to their understanding of the intended business arrangement.  Even for the single member limited liability company, there are number of good reasons to adopt a written operating agreement.


The sole proprietorship is the simplest form of business entity. Its major drawback is the unlimited liability of the owner.  A general partnership provides pass-through tax treatment, but each partner is liable for the debts of the partnership.  This personal liability for the debts of the partnership is a major drawback.  The shareholders of regular corporations (C Corporations) do not have personal liability for the debts of the corporation.  The employee-owner of a C corporation may be eligible for certain tax free or tax favored fringe benefits not available to other business owners.  However, the C corporation must pay income tax and therefore, the possibility of double taxation exists.  The shareholders of the S corporation receive pass through tax treatment, without being liable for the corporate debts.  However, there are restrictions which may prevent the corporation from electing Subchapter S status.  For example, the S corporation cannot have more than seventy-five shareholders, and the shareholders may not be corporations, partnerships, non-qualifying trusts, or nonresident aliens.  There are additional restrictions and limitations of S corporations, which if not met, cause the S corporation to lose its status as an S corporation.  Limited partnerships provide limited liability for the limited partners and pass through tax treatment.  The general partner, however, is liable for all of the limited partnership’s debts.  Although a corporation may be the general partner, it must meet minimum net worth requirements.  The limited liability company provides pass through tax treatment and limited liability for its members.  The restrictions which apply to S corporations do not apply to LLC’s.

It is prudent to consult with a business or corporate lawyer in connection with making your decision to form a business entity such as a partnership, corporation, or limited liability company.  Further, prudence dictates that one seek the assistance of an attorney to complete the formation and organization of the entity.  While one might be able to file simple articles of incorporation or articles of organization, this does not complete the organization of the entity.  If the organization of the entity has not been properly completed, it is unlikely that the entity will provide any liability protection to its shareholders or members.

Contact one of the lawyers of Chambers, Chambers & Chambers, LLP if you need assistance with the formation of your corporation or limited liability company, or need assistance with an existing business. Our firm has served clients for a variety of business matters in DeKalb County, Fulton County, Gwinnett County, and Cobb County, as well as other counties in Georgia. Whether you are forming a corporation or limited liability company, or have legal needs related to an existing business, please give the attorneys of Chambers, Chambers & Chambers, LLP in Atlanta, Georgia, the opportunity to assist you with your legal needs.

Disclaimer: The above memorandum provides some general information about various forms of business entities, including corporations, limited liability companies, and partnerships. It is provided for informational purposes only and should not be considered legal advice.No person should act or refrain from acting on the basis of information contained herein.You should seek appropriate legal advice on your particular legal matter from an attorney licensed in your state.This content may not reflect current legal developments, and this firm disclaims all liability with respect to actions taken or not taken based on any information contained herein.


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