Business Formation

While entity types may differ slightly across jurisdictions in the United States, the District of Columbia offers you all the most popular options to be able to start your desired business, and a clear guide to begin your comparison and selection process:

DC Business Entity Types: These options offer different types of support.

Limited Liability Company (LLC)
An LLC is a hybrid business that draws advantageous characteristics from both corporations and partnerships.
Advantages
Profits and losses pass through the company to its owners for tax purposes
Personal assets are protected from business liability
No limitation on the number or nature of owners
Simpler to operate than a corporation
Not subject to corporate formalities
Owners may participate in management of the business
Disadvantages
Legal assistance is needed to properly set up and structure an LLC
Professionals—such as lawyers, architects, accountants, engineers and doctors, etc.—shall register Professional LLC (PLLC).
 
C (General) For-Profit Corporation
A business formed by law as a separate legal entity from its owners (stockholders and shareholders).
Advantages
Has a lifespan independent from its owners (stockholders)
Fringe benefits costs are tax-deductible
Personal assets are protected from business liability
Ownership can be transferred through the sale of stock
Easy to raise operating capital through the sale of stock
Ownership can change without affecting its day-to-day management
Disadvantages
Incorporating involves considerable start-up expenses
Subject to more district and federal legislation
Corporate earnings subject to double taxation
Many legal formalities exist when filing and trying to maintain corporate status
Activities are limited
 
S (For-Profit) Corporation
A business similar to a General Corporation, with the exception of specific IRS requirements.
Advantages
Already exists as a corporation
Corporate earnings avoid double-taxation
Disadvantages
Difficult to qualify for IRS requirements
 
Nonprofit Corporation
An organization that has no owners, gives no income (except salaries/expenses) to members, directors or officers and must have a Board of Directors.
Advantages
Tax Exemption
Business Operation Flexibility
Disadvantages
Merger limitations
 
Limited Partnership
A business similar to a general partnership, however, one invests assets into the business at their own risk and is limited to the amount of capital invested. The investor is not involved in management and does not share in the liability for debts or losses.
Advantages
Relatively easy to establish
Partners share in start-up expenses
Financing is easier to obtain than for a sole proprietorship
Partners share all profits and reap all benefits of ownership
Limited Partnership partners’ assets are not at risk from creditors
Disadvantages
More expensive to set up initially, due to the requirement for a written agreement
Operating (general) partner has unlimited liability for business expenses
Loss of one partner may dissolve the business
Partnership may be difficult to end
 
Limited Liability Partnership (LLP)
A business where partners are given the same limited liability protection as professional corporations.
Advantages
Tax advantage of flow-through tax treatment for LLP partners
Not subject to the numerous limitations regarding ownership, capital structure and division of profits
Simple and familiar for an existing partnership to elect to become an LLP
Disadvantages
A sole owner cannot set up an LLP as a partnership, an LLP must have at least two partners to exist
 
Cooperative Association (General Cooperative Association or Limited Cooperative Association)
A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.
Advantages
Less Taxation.
Funding Opportunities
Reduce Costs and Improve Products and Services
Perpetual Existence
Democratic Organization
Disadvantages
Obtaining Capital through Investors
Lack of Membership and Participation
 
Business Statutory Trust
New type of business entity, which is the entity of choice for several categories of business transactions – namely, organization of mutual funds, asset securitization, and tax-advantaged real estate transactions.
 
Sole Proprietorship
A business that is owned by a single individual.
Advantages
Minimal legal restrictions or requirements
Not required to pay unemployment taxes
Easiest and least expensive to set up
Disadvantages
No unemployment benefits if the business fails
Personally liable for all business transactions
 
General Partnership
Advantages
The partners share workload and responsibilities
The partners share all profits and reap all benefits of ownership
Disadvantages
Each partner is bound by the actions of the other partner
Loss of one partner may dissolve the business
 
What’s Next
Need additional research? Further resources are available to read at DC’s Department of Consumer and Regulatory Affairs (DCRA) as well as US Small Business Administration (SBA), the DC Chamber of Commerce and many other organizations designed to get you started.

Decision – Corp, LLC, Other? This choice includes some key questions.

Owner total and type. How many owners will there be, and could some of these foreseeably be investors like other LLCs or entity types? Partnerships require at least two partners minimum but have no max, while an LLC structured for to be taxed as an S-Corp cannot have more than 100 members.

Liability Limitations. How important is limiting personal liability for debts or claims against the business? In general, incorporating is the best means of limiting many forms of business liability.

Service Type. Will this business provide the market with legal, medical or other regulated professional services? This may add requirements to who can make management decisions and what documents to file.

Tax Advantages. Which business structure will result in the lowest taxes? There is no universal answer to this question. Tax-wise, however, some structures are better for some situations. Will your business want pass-thru taxation, structured corporate deductions, layered or international arrangements?

Operational Structure. Will the company be reporting to investors or have other complex operations that benefit from structure? Corporations carry certain formalities, while a general partnership could exist with none.

Steps to Form: The market offers a few options.

Ready to start?
If you have already reviewed these sites and now want to start your business, you can proceed directly to the DC Government’s Business Center that offers a startup “Wizard.” Basic filing fees for all steps typically will cost a few hundred dollars.

Typically for a few hundred more, you can visit automated third-party sites like LegalZoom or RocketLawyer that can consolidate more of the steps and offer a non-attorney typically to answer some of the more frequently asked questions. These are excellent options to get a business started.

Want more? 
The above-mentioned out-of-the-box templates are great for most purposes, but often are quite simplified, which can cause trouble to a company down the road – when issues arise concerning business sale, assignment and liquidation, etc.

Because companies grow and pivot as the market changes, therefore we encourage you to start your business with these aspects tailored to your business. Contact us for a quick all-in-one package that is tailored to your business with the benefit of corporate counsel.

Latest News