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Types of Business

There are several different business structures that can be used to organize a business, depending on the size of the company and profitability, how many people will be owners, and whether or not the business involves serious risk.  For information on nonprofits, see Resources, below. 

Sole Proprietorship

A sole proprietorship is a business that is owned by one person and that is not registered as a corporation. These are easy to set up and maintain and are considered to be the simplest of business structure.  Sole proprietorships must comply with local business licensing or permit laws to be legitimate, and the owner is personally responsible for all business taxes and debts.

The owner of a sole proprietorship is personally liable for the entire amount of any business-related debts or judgments. This means that creditors of the business can come after personal assets to collect what the business owes.

Partnerships

A partnership is a business owned by two or more people that is not a corporation or proprietorship. You do not have to complete any paperwork to create a partnership; the arrangement begins when you start a business with another person.  Unless there is a written agreement between the partners, the partnership laws of the state in which the business is housed governs the partnership.

Generally, partners share equally in the management and profits of the partnership, and assume equal responsibility for debts and liabilities. Creating a written partnership agreement is best for many reasons; chief among them is clarifying the level of participation, identifying what is expected of each partner, and spelling out what percentage of the costs and profits each partner is entitled to.  These agreements are best written before business begins.

General Corporation

The corporation is a separate legal entity owned by the stockholders. A general corporation may have an unlimited number of stockholders who are protected from the creditors of the business. The personal liability of a stockholder is usually limited to the amount of investment in the corporation and the type of corporation.

S Corporation

An S Corporation is a special tax designation granted by the IRS to corporations.  S Corporations have the same advantages and disadvantages of a general corporation with the exception of S Corporation special tax provisions. When a standard corporation makes a profit, it pays a federal corporate income tax on the profit and the shareholders must pay additional taxes on the dividends.

S Corporations avoid this double taxation because all income or loss is reported only once on the personal tax returns of the shareholders. Also, S Corporation shareholders are exempt from personal liability for business debt.

Limited Liability Company (LLC)

LLCs present an alternative to corporations and partnerships because LLC owners can have the corporate liability protection for their personal assets from business debt and have the tax advantages of partnerships or S Corporations.  LLC owners are normally protected from personal liability for business debts and claims.

Unlike a corporation, an LLC is not considered separate from its owners for tax purposes.  Business income passes through the business to the LLC members, who report profits on their individual income tax returns.

In all cases of determining the right business structure for you, look to the experts who can advise you on the best business entity.  In addition to your local community, county and state resources, and Small Business Development Center, contact the Small Business Association and your local SCORE office.

Resources

Disclaimer:  Although the sites and links provided below are presented in good faith and believed to be correct, e-Clarity LLC, makes no representations or warranties as to the completeness or accuracy of the information.  In all cases we urge you to seek professional advice.

Business structures from Internal Revenue Service

Incorporating your business from MoreBusiness dot com

Incorporating frequently asked questions from MoreBusiness

Forming a nonprofit corporation FAQ from Business Filings, Inc.

Two types of corporations:  Non-profit and For-profit from MAP

Creating a Partnership from Nolo Law

The three common organization types for small businesses from 123 Enterprises, Inc. 

 

 

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