Sole Proprietorship
The sole proprietorship is a simple, informal
structure that is inexpensive to form; it is usually
owned by a single person or a marital community. The
owner operates the business, is personally liable for all
business debts, can freely transfer all or part of the
business, and can report profit or loss on personal
income tax returns.
Limited Liability Corporation (LLC)
The LLC is generally considered advantageous for small
businesses because it combines the limited personal
liability feature of a corporation with the tax
advantages of a partnership and sole proprietorship.
Profits and losses can be passed through the company to
its members or the LLC can elect to be taxed like a
corporation. LLCs do not have stock and are not required
to observe corporate formalities. Owners are called
members, and the LLC is managed by these members or by
appointed managers.
General Partnership
Partnerships are inexpensive to form; they require an
agreement between two or more individuals or entities to
jointly own and operate a business. Profit, loss, and
managerial duties are shared among the partners, and each
partner is personally liable for partnership debts.
Partnerships do not pay taxes, but must file an
informational return; individual partners report their
share of profits and losses on their personal return.
Short-term partnerships are also known as joint ventures.
C Corporation (Inc. or Ltd.)
This is a complex business structure with more startup
costs than many other forms. A corporation is a legal
entity separate from its owners, who own shares of stock
in the company. Corporations can be created for
profit or nonprofit purposes and may be subject to
increased licensing fees and government regulation than
other structures. Profits are taxed both at the corporate
level and again when distributed to shareholders.
Shareholders are not personally liable for corporate
obligations unless corporate formalities have not been
observed; such formalities provide evidence that the
corporation is a separate legal entity from its
shareholders. Failure to do so may open the shareholders
to liability of the corporation's debts. Corporate
formalities include:
- issuing stock certificates
- holding annual meetings
- recording the minutes of the meetings
- electing directors or ratifying the status of
existing directors
Corporations should always be assisted by a qualified
attorney.
Sub Chapter S Corporation (Inc. or Ltd.)
This structure is identical to the C Corporation in
many ways, but offers avoidance of double taxation. If a
corporation qualifies for S status with the IRS, it is
taxed like a partnership; the corporation is not taxed,
but the income flows through to shareholders who report
the income on their individual returns.
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