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Choosing a Legal Structure

Note: Many of the forms referenced below must be secured from the Idaho Secretary of State’s office by calling 208-334-2301. They are no longer available online.

 

Sole Proprietorship

This is the simplest business structure to create. All businesses are considered sole proprietorships unless specifically registered with the Secretary of State’s office as a corporation, partnership, LLC, or non-profit entity. If the business will operate as a sole proprietorship, filing a certificate of “Assumed Business Name” is sufficient; no additional paperwork is required. A sole proprietorship is:

  • Owned by one individual, who has responsibility for all business decisions and financial obligations. Business revenue (income) is considered the owner’s personal income and is taxed at the owner’s personal tax rate. Business liabilities (debts) are the owner’s personal liabilities.
  • Is NOT a separate legal entity but an extension of the business owner. If the business incurs debts or is sued, the owner’s personal assets can be used to satisfy the debt or a court judgment.
  • Does NOT offer liability protection.
  • Pays taxes by filing Schedule C with the owner’s personal income tax return. The owner pays quarterly estimated tax on business profits and pays self-employment tax. See the Taxes section of this site for information about both.
  • The business terminates upon the owner’s retirement, death or bankruptcy. Assets are disposed of according to the owner’s wishes, the terms of the owner’s will or a court order.

To change the address, owner’s name, or close a sole proprietorship, file a “Cancellation or Amendment of Certificate of Assumed Business Name” with the Secretary of State’s office.

Partnership

A General Partnership involves two or more people who operate a business together. The partnership is created by filing a Statement of Partnership Authority with the Secretary of State. A general partnership may be converted to a limited liability partnership.

  • General partners share unlimited personal liability for the obligations of the business. The partners’ personal assets may be used to satisfy creditors, including debts incurred by only one partner.
  • Business operations are governed by the terms of a written Partnership Agreement created by an attorney in accordance with Idaho law.
  • When a partner leaves the business, she/he files a “Statement of Denial” or a “Statement of Dissociation” with the Secretary of State’s office. An attorney will then need to amend the Partnership Agreement to reflect the change.
  • Partners share in the profits and losses of the business according to the terms of the Partnership Agreement. Profits are taxed as personal income. 
  • Partnerships end with the death, retirement, expulsion, incapacity, or personal bankruptcy of one partner unless the Partnership Agreement states otherwise. Partnerships are governed by the Idaho Uniform Partnership Act.
Foreign Partnerships: Partnerships organized in another state and wishing to do business in Idaho can file a Foreign Registration Statement.
Caution: Under Idaho law, a legally binding partnership may be created orally, in writing, or by the actions of two or more parties. Individuals who engage in a common effort to make and share profits from a business activity or businesses that represent themselves to the public as partnerships may have created a legal partnership, even if they have not registered as a General Partnership with the Secretary of State. Creating an unintentional or implied partnership could have serious legal or financial implications.

Limited Liability Partnership (LLP); Professional Limited Liability Partnership

Most often formed by professional businesses, such as doctors, lawyers and CPA firms. Provides individual partners protection from personal liability for the acts of the partnership and/or the acts of other partners that might negatively affect all partners (misconduct, negligence, etc.). The partners continue to share liability resulting from general activities of the partnership.

  • An attorney creates a written Partnership Agreement to govern the general affairs of the business.
  • Taxed like a general partnership
  • Individuals or an existing general partnership may elect to become an LLP or PLLP by filing a “Statement of Qualification” with the Secretary of State’s office.

Limited Partnership

Consists of two or more individuals who jointly own a business in an unequal capacity. The limited partner/partners are generally financially liable for debts only to the extent of their financial investment in the business. They usually have limited or no control over management of the company. The general partner/partners manage the company and face the greatest potential risk and reward from business operations. Silent partners are considered limited partners.

  • Formed by filing a “Certificate of Limited Partnership” with the Secretary of State’s office. The limited partners (or silent partners) do not need to be identified. (They must be identified if applying for an alcohol license.)
  • To protect the interests of both the limited and general partners, an attorney must create a Partnership Agreement detailing the terms and responsibilities of each partner.

Corporation

This is the most complex entity type to establish. Legal assistance is generally required to create Articles of Incorporation and Bylaws to manage and regulate corporate affairs.

  • Is a separate legal entity from its owners (shareholders) and may be privately or publicly held. (Publicly held corporations issue stock to the public.)
  • Controlled by a Board of Directors, which is in turn controlled by the corporation owners (shareholders). Though a corporation is a separate legal entity from the owners, it is possible to “pierce the corporate veil of protection” if a business owner (incorporator) personally co-signs a lease or loan agreement, pledges personal assets as collateral for a loan, or fails to keep business and personal finances separate. The owners can also be held personally liable if the corporation fails to pay employment taxes to the IRS, including Social Security and Medicare.
  • Corporate profits may be taxed twice if the corporation issues dividends – once as income to the corporation and once as a dividend to the owners (shareholders).
  • Must hold annual meetings, keep minutes of meetings, and file reports of activities.
  • Is dissolved by a vote of the shareholders, by court order, or administratively dissolved for failure to return the annual report to the Secretary of State’s office. (See the Glossary for an explanation.) Corporations must keep their address current with the Secretary of State’s office or risk being administratively dissolved when their annual report form is returned by the Post Office, which cannot forward report forms. (See “Changing Registered Information.”) If a corporation is administratively dissolved, the process to become reinstated can be time-consuming and may be expensive and the business may be prevented from legally conducting business in Idaho until the situation is resolved.

Registering a Foreign Corporation: Corporations registered in another state and wishing to conduct business in Idaho can register as a foreign corporation by filing a Foreign Registration Statement.

Unemployment Tax Payments: If the corporation owner/owners are also shareholders and actively work in the business, they must report a fair market wage before taking distributions or dividends that are not taxable as wages. Many new business owners do not realize that they, themselves are considered employees if they work in the business. All corporations whose owner/officers provide services must open an unemployment insurance tax account with Idaho Department of Labor and either report wages or opt out as a corporate officer. For details, contact your nearest IDOL office.

Several types of corporations are recognized in Idaho including C, S, Non-profit, and Professional Service Corporations. Each is discussed below.

S Corporation

Offers the protection of a corporation with the flexibility of a partnership.

  • Profits and losses pass through to the owners as if the business were a partnership.
  • Files “Articles of Incorporation,” adopts Bylaws, and holds regular meetings. In Idaho, the same forms are used to establish an S corporation and a C corporation.
  • Cannot be owned by more than 100 individuals (shareholders) and cannot be owned by another corporation, partnership, or a non-U.S. citizen or resident.
  • To qualify as an S Corporation, the owners file Form 2553 with the Internal Revenue Service indicating their tax reporting status. If the S Corp ceases to exist, both the IRS and the Idaho Secretary of State’s office must be notified.
  • Some business types, including financial institutions and insurance companies, cannot be organized as S Corporations. See the IRS website for details.

C Corporation (C-corp)

Non-profit Corporation

Exists to provide a community service. Funding comes from donations and grants received from corporations, foundations, individuals and government agencies.

  • Non-profits must first apply for and seek to maintain tax-exempt status from the Internal Revenue Service before registering with the state. The process is time-consuming and expensive, so be certain your business qualifies before applying. An attorney or CPA can prepare and file the application.
  • After obtaining IRS approval, the non-profit registers in Idaho. To reserve a name while awaiting IRS approval, “Application for Reservation of Legal Entity Name” can be filed.
  • The “Articles of Incorporation” must contain a clause stating the specific purpose of the business and a provision for the disposal of assets should the non-profit cease to exist.
  • Tax reporting requirements are found on the IRS website
  • Non-profits engaged in the solicitation of donations from the public must comply with the “Idaho Charitable Solicitations Act.”

Individuals serving on the board of a charitable organization have specific obligations under Idaho law. See the Idaho Attorney General’s booklet, “Service on an Idaho Non-profit Board of Directors.”

Professional Service Corporation

Registered by individuals engaged in a limited number of professions, such as medical, dental or legal. A list of qualifying business types is available from the Secretary of State’s office. Created by filing Articles of Incorporation Professional Service Corporation.

​Unincorporated Non-profit Association

Registered by homeowners associations, sports leagues and a few other organizations that offer a benefit to a large group of individuals and whose officers or agents change regularly. The purpose of registration is to identify a contact person, known as an Agent for Service of Process, for legal proceedings. Whenever the contact person changes, the Secretary of State’s office must be notified.

Limited Liability Company (LLC)

Provides the liability protection of a corporation and the federal tax benefits of a partnership or sole proprietorship. Formed by filing a “Certificate of Organization” with the Secretary of State’s office.

  • Operates under a legal contract between the owners called an “Operating Agreement.” All LLCs, including single member ones, need a legal Operating Agreement created by an attorney that conforms with Idaho law. If an agreement is not created, the business is governed by the “Idaho Uniform Limited Liability Company Act,” which may not be in the business’s best interests.
  • The individual owners, called governors, members or managers, are protected from personal liability for the acts of the company. They are not personally liable for debts, obligations, or liabilities created by the company unless one of the business governors/owners/managers engages in activities that “pierce the veil” of protection.
  • The veil of protection from liability is “pierced” when an owner co-signs a lease, loan application or another legal document or fails to keep business and personal finances separate. The IRS can also hold the business owner/managers personally responsible for failure to remit taxes withheld from employee wages, including Social Security and Medicare payments.
  • Taxed like a sole proprietorship (if one owner) or a partnership
  • A single member LLC terminates upon the death, retirement or bankruptcy of the owner or by court order. A multi-member LLC terminates in accordance with the terms of the LLC’s Operating Agreement, a court order or state law. The Idaho Secretary of State’s office must be notified of termination by filing the appropriate form. Business assets are liquidated and distributed in accordance with the terms of the Operating Agreement or by court order.
  • An LLC can lose its status if the annual report is not returned to the Idaho Secretary of State’s office in a timely manner. See Administratively Dissolved Corporations and LLCs.

The Internal Revenue Service does not recognize LLCs as a unique tax reporting entity. (LLCs are created by state, not Federal, law.) Therefore, taxes are reported in the same manner as a corporation, partnership or sole proprietorship (called a disregarded entity), depending on the size and complexity of the LLC. See the IRS website for details.

Registering a Foreign LLC – An LLC formed in another state can register to do business in Idaho by completing a Foreign Registration Statement.

Changing the Registered Address or Agent, Dissolving an LLC – Contact the Secretary of State’s office for information and to access to the correct form. An LLC must have a current address on file with the Secretary of State’s office or risk being administratively dissolved when its annual report form is not returned. The Post Office cannot forward annual report forms. If your LLC is administratively dissolved and you want to reinstate it, contact the Secretary of State’s office for information. There is a cost to be reinstated.

Professional Limited Liability Company (PLLC)

LLCs whose members offer a professional service (18 professions qualify) can register as PLLCs. Contact the Secretary of State’s office for details. A list of acceptable professions is found on the application form.

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