Last updated:  August 23, 2003

Corporations
Other Forms of Business Organization

The following paragraphs describe forms of business organization that in some sense lie between the partnership and corporate forms:

A limited partnership has one or more general partners and one or more limited partners. The liability of a general partner for partnership debts is unlimited in a limited partnership, as it is in a general ("normal") partnership. The liability of a limited partner, though, like that of a shareholder of a corporation, is limited to the limited partner's capital contribution. In theory, a limited partnership is controlled by its general partner or partners, and its limited partners must be passive investors; a limited partner that takes part in the control of the partnership can become liable as a general partner. In practice, this requirement is easy to get around, at least under the 1985 amendments to the Revised Uniform Limited Partnership Act. For example, the general partner of a limited partnership can be a corporation, and a limited partner can also be an officer of that corporation without thereby being treated as participating in the control of the partnership.

Limited partnerships did not exist under the common law; they are creations of statute, and all the states have authorized them.

A Subchapter S corporation is a corporation that satisfies the requirements of Subchapter S of the Internal Revenue Code (IRC) and may therefore pass through its gains and losses to its shareholders without taxation at the corporate level, making its tax treatment much like that of a partnership. Under the IRC, a Subchapter S corporation cannot have any of the following: more than thirty-five shareholders, a corporate shareholder, a non-resident alien shareholder, or more than one class of stock.

A limited-liability company (LLC) is a relatively recent form of business organization, also often designed to provide pass-through tax treatment to its shareholders, which in an LLC are usually called "members." The Internal Revenue Service formerly looked to four characteristics to determine whether a business entity that is not a corporation is "an association taxable as a corporation"; if the entity lacked any two of the characteristics, it was taxed as a partnership. The four characteristics were (1) limited liability, (2) centralized management, (3) free transferability of interests in the entity, and (4) continuity of life. The IRS abandoned this approach in 1997, however, and now allows LLCs (and other non-corporate business entities) to elect either corporate or partnership tax treatment.

All of the states have adopted LLC statutes. The statutes differ, though, with some allowing considerable flexibility in the formation of an LLC, and whether a given LLC will be treated by the IRS as taxable as a corporation may depend on the specific provisions that govern it.

A limited-liability partnership (LLP) is an even more recent organizational form, and is basically a partnership in which partners are not liable for partnership obligations arising from matters in which they were not involved and which they did not supervise. New York, Delaware, and other states have recently authorized LLPs.