Choosing an entity: the seven factorsElegir la forma societaria: los siete factores
The comparison grid the course uses for the chapter 2 scenario, rewritten as questions, plus a one-page map of the forms.La cuadrícula de comparación del escenario del capítulo 2, reescrita como preguntas, más un mapa de una página de las formas.
- Formation, cost and flexibilityConstitución, costo y flexibilidad: What must be filed, what it costs, which formalities follow (meetings, reports, franchise tax). Sole proprietorships and general partnerships need nothing; everything else needs a filing, and a missed filing turns a would-be LP or corporation into a general partnership.
- Tax treatmentRégimen fiscal: Pass-through (proprietorship, partnership, LLC by default, S corporation) or entity-level tax plus tax on dividends (C corporation)? Who can use losses? Can the owners even qualify (S corporations exclude nonresident aliens)? Would foreign owners prefer corporate treatment for treaty reasons?
- Personal liabilityResponsabilidad personal: Who is exposed for debts, torts and guaranties? Unlimited for proprietors and general partners; limited for limited partners who stay out of control, LLP partners (except their own misconduct), LLC members and shareholders. Remember banks ask for personal guaranties anyway.
- Management and controlAdministración y control: Who runs the business day to day, who votes on what, do passive investors need protection or vetoes? Limited partners lose their shield if they manage; LLC members can manage without losing anything.
- Capital and economicsCapital y economía: Who contributes money and who contributes work; how salaries, distributions and allocations of profit and loss are set. Partnership default is equal shares regardless of contribution unless agreed.
- Transferability and continuityTransmisibilidad y continuidad: What happens on death, disability, divorce, withdrawal or sale: free transfer of stock unless restricted; partnership interests carry only economic rights to a transferee; at-will partnerships can be dissolved by any partner.
- Long-term goals and exitMetas de largo plazo y salida: Stay small, grow, franchise, admit investors, sell, pass to family or go public? Venture capital and public markets want a corporation; family businesses and professional firms usually want an LLC or LLP.Saying "LLC because limited liability" is a conclusion. The stronger answer says why that factor should dominate these owners, this business and these risks, and names the factor that cuts the other way.
The map of forms (own words)
| Form | Liability of owners | Tax | Who manages | Formed by |
|---|---|---|---|---|
| Sole proprietorship | Unlimited | Owner’s return | Owner | Nothing (maybe a DBA filing) |
| General partnership / joint venture | Unlimited, each partner binds the others | Pass-through | All partners, equal votes by default | Conduct; no filing |
| Limited partnership | GP unlimited; LPs limited while passive | Pass-through | General partner | Filing plus written agreement |
| LLP | Limited, except own or supervised misconduct | Pass-through | Partners | Registration, fee, often insurance |
| LLC | Limited | Pass-through by default; may elect corporate | Members or managers | Filing plus operating agreement |
| C corporation | Limited | Entity tax plus tax on dividends | Board elects officers | Certificate of formation |
| S corporation | Limited | Pass-through, with eligibility limits | Board | Certificate plus tax election |
After the choice comes the drafting
Picking the entity is half the answer. The other half is the agreement that makes the relationship work: employment and salary, distributions, votes and vetoes, transfer restrictions, buy-sell triggers, what needs unanimity. Chapter 3 lives there.
Mexican contrast
The LLC does the job of the S. de R.L. and the corporation of the S.A., but the tax logic is reversed: in Mexico every sociedad pays ISR, so pass-through is the exotic case. Here pass-through is the default for everything except the C corporation, which is why so many small businesses never incorporate.