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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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