CHOICE OF BUSINESS ENTITY
What type of business entity structure is best for you?
Sole Proprietorship is the simplest form of business ownership for a single owner. Tax reporting is done on the individual’s 1040 and the owner is responsible for reporting all income and loses. The owner is personally liable for all damages and the owner’s other assets could be at risk.
Joint Venture is another simple form of business ownership, and depending upon the number of business partners, it virtually operates as multiple sole proprietorship with each partner reporting their interest on their individual 1040. Each owner is personally liable for damages and the owner’s other assets could be at risk.
General Partnership is an association,by agreement, of two or more people doing business together. The partnership is managed by all partners and files its own tax returns, passing the profits and losses to each partner, in proportion to their ownership interest. Each partner is personally liable and the partner’s other assets could be at risk.
Limited Partnership has both general and limited partners. The general partners manage the day to day operations of the business, while the limited partners are generally investors who are not active in the business operations. The limited partners are usually only liable for their investment in the partnership while the general partners may have more exposure and liability as the managers of the entity. The partnership files a tax return passing the income and losses to the partners in proportion to their ownership interest.
Limited Liability Company ("LLC”) is a business entity that offers liability protection to its owners. An LLC operates by an agreement and can be set up as a single member sole proprietorship (called a "disregarded entity”), a partnership or a corporation, depending upon the number of members and an election made at formation. LLC members are taxed according to the type of business election made, and may offer tax allocation advantages to the members. Today, because the liability protection to its members, and the potential tax advantages, an LLC is one of the most popular forms of doing business
Corporation is a legal entity, separate and apart from its owners who are shareholders. A corporation is formed by filing "Articles of Incorporation” with the State, and once approved, the entity is created, stock is distributed to the shareholders, and the shareholders select the Board of Directors who then select officers to run and manage the corporation. There are two major types of corporations, that among other differences, offer different taxation rules.
C-Corporation is a corporation with an unlimited number of shareholders that pays taxes at the corporate level. Profits may be subject to double taxation, first as the corporation pays taxes on its profits and a second time by the shareholders who receive profit distributions as dividends which are considered personal income.S-Corporation is a corporation, presently limited to a maximum of 100 shareholders, referred to as a "pass-through entity” because it passes its corporate income, losses, deductions, and credits through to the shareholders, who report the information on their personal returns, at their individual tax rates; double taxation is avoided. An S-Corp has strict requirements that must be followed, so while it is one of the most popular forms of business ownership, strict compliance rules must be followed.
The decision on the type of business entity for your business is an important decision and should be made with you and your professional advisors who will discuss with you the type of management and control that is appropriate, taxation issues, and ease of administration.