Choosing between an unincorporated association and corporation for a business just starting out can be difficult. Each has its own benefits regarding management, liability and taxation. When considering options, entrepreneurs should also consider the organizational hybrids that have been created over the past few decades. These hybrids can provide an important alternative to businesses just starting out.
Unincorporated associations are groups that come together for a shared purpose, such as to start a business or further a shared initiative. These are not distinct legal entities, and states do not require that any specific formalities be met for these organizations to form. In some cases, however, for an unincorporated association to be recognized by the state it must have a minimum amount of members. The best known type of business unincorporated association is a general partnership.
Corporations are organizations that are distinct legal entities. To become a corporation, an organization files articles of incorporation with the state where the corporation is headquartered. A corporation is organized with a board of directors, which is elected by the shareholders, who make the larger strategic decisions for the organization. The board appoints the officers of the corporation, who run the day to day operations.
Unincorporated Vs. Incorporated
The key differences between an unincorporated association and a corporation involve ownership control over the business, legal liability for business debts and actions, and taxes. An unincorporated association, like a general partnership, allows all owners to participate in the management and day-to-day activities of the business. A corporation does not permit a corporation’s owners to do that, limiting their influence to voting rights on larger issues such as mergers and the selection of boards of directors. As a result of this control, partners are liable for all of the partnership’s debts and actions, while shareholders are not personally liable for a corporation’s liabilities. As for taxes, partners are taxed annually on their share of a partnership’s business income. A corporation is viewed as a separate entity from its owners and is therefore taxed on any income it earns. When that income is distributed to its shareholders, that income is taxed again, effectively taxing the business’s income twice.
For many years, business owners could only choose between a partnership or corporation for their business. Over the past few years, a few organizational hybrids of unincorporated and incorporated organizations have been created that combine the benefits of partnerships and the corporation. Limited partnerships and limited liability companies protect individual owners from the business’s liabilities, like a corporation, but the business’s income is only taxed once, like a partnership. These hybrids do not really qualify as incorporated or unincorporated, but they are important to consider when starting a business.
If you are starting a business, consult with an attorney in your area to ensure that you make all of the correct state and federal filings. An attorney can also advise you as to the best option for your business’s needs. While every effort has been taken to ensure this article’s completeness and accuracy, it is not intended to be legal advice.