Business Structures
Sole Proprietorship
Perhaps the simplest and least expensive form of business structure, it’s the type of business favored by the majority of new businesses. Under a sole proprietorship, the owner operates the business, is liable for all of the business debts, can freely transfer all or part of the business, and can report profit and loss on his/her personal income taxes.
General Partnership
Similar to sole proprietorships, general partnerships are relatively easy and inexpensive to form. Partnerships require an agreement between two or more owners of a business. Profits and losses are split amongst the owners and each owner is responsible for company debt. Partnerships do not file taxes as a business (they are required to file an informational return with the IRS), but the owners of the business will report the profits and losses on their personal tax returns. Short term partnerships are also known as joint ventures.
Limited Liability Company (LLC)
An LLC is generally considered to be advantageous for a small business because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and a sole proprietorship. Profits and losses can be passed through the company to its members or the LLC can elect to be taxed as a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers.
To create an LLC in Hawaii, you must file Articles Of Organization with the State using From LLC1.
Information on forming an LLC in Hawaii can be found here: https://cca.hawaii.gov/breg/registration/dllc/
C Corporation (Inc. or Ltd.)
A C Corporation is a more complex business structure that requires additional start-up costs as compared to other types of businesses. A corporation is a unique legal entity that is completely separate from its owners, who own stocks or shares of the company. Corporations can be formed as for-profit entities or non-profit entities and are subject to additional licensing fees and government regulations than other types of business structures. It is important to understand that there are different types of stocks that a corporation can issue. For instance, there may be stocks issued that provide for voting rights or stocks that only provide ownership and profit rights. Articles of Incorporation should provide information on the number of allowable shares that a corporation may issue and the rights that ownership of those shares provide.
Under a C Corporation, shareholders are not personally liable for corporate obligations and debts unless corporate formalities have not been followed: such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to follow corporate formalities may result in shareholders being held liable for the corporation’s debts. Corporate formalities include:
- Issuing stock certificates
- Holding annual meetings
- Recording the minutes of the meetings
- Electing directors or ratifying the status of existing directors
As corporations are subject to stricter oversight and greater government regulations, corporations should always employ the services of qualified corporate attorneys.
For information regarding registering a corporation with the State of Hawaii, please see the link below:
https://cca.hawaii.gov/breg/registration/dpc/
Sub Chapter S Corporation (Inc. or Ltd.)
In many ways, this business structure is similar to a C Corporation, but it reduces the tax burden. If a corporation qualifies with the IRS for an S status, it is taxed like a partnership and the corporation itself is not taxed. Income flows through the corporation to the shareholders who then report the income on their individual tax returns.
The following link provides a comparison of issues related to the differences between specific business structures: http://files.hawaii.gov/dcca/bac/business_entity_comparison_chart.pdf
Remember to consider all the factors listed when determining which business structure is right for you.