What Type of Business Structure is Right for you?
What Type of Structure is Right for You?
There are different ways to structure a business.
- Sole Proprietorship
- Partnership
- Corporation
- Limited Liability Company (LLC)
Sole Proprietorship
A sole proprietorship is business that is owned by one person and is not a separate entity like a corporation or LLC. There is no requirement of a written document to create the business. It is the simplest form of business organization to start. The business has no existence apart from the owner. Its liabilities and risks are the owner’s personal liabilities and risks. The owner includes the income and expenses of the business on his or her own tax return in a Schedule C.
Partnerships
A partnership exists between two or more people who together carry on a trade or business. There is no requirement of a written agreement, even though it is an entity separate from the people. Each person contributes finances (money or property) or work (labor or skill) and each person shares in the profits and losses of the business.
A partnership is not taxed on the income of the partnership, rather, each partner includes his or her share of the partnership’s income or loss on his or her tax return.
General Partnerships: Each partner is completely legally responsible (liable) for the actions of all partners and the partnership.
Limited Partnerships: A general partner manages the partnership, so that person is legally responsible (liable) for the actions of all partners and the partnership, but the limited partners only contribute money, so the most they can lose in their investment. If limited partners actively participate in the business of the partnership they may jeopardize their limited liability status.
Limited Liability Partnership: A limited liability partnership must have two or more partners whose type of business is the practice of public accountancy, of law or of architecture. It is used to limit a person’s exposure to the malpractice of the other partners.
Corporations
C Corporation: In forming a corporation, the owners of the company (called shareholders) transfer money, property, or both to the corporation as capital stock. There can be different classes of stock with different ownership rights.
The profit of a corporation is taxed to the corporation. If profits are paid to the shareholders as dividends, that is also taxed as income to the shareholders on their personal tax returns. However, shareholders cannot deduct any loss of the corporation.
S Corporation: An S corporation is often called a hybrid business entity. Like a C Corporation, it is a separate legal entity and generally offers liability protection to its shareholders. However, it is taxed like a partnership or sole proprietorship in that it is a conduit where the profit or loss flows through to the shareholders. . Its shareholders include on their tax returns their share of the corporation’s income, deduction, loss, and credit.
The corporation must file an election with the IRS to be treated as an S corporation. They are limited to 100 shareholders and 1 class of stock. Shareholders can only be individuals (humans), estates or certain trusts.
Limited Liability Company
An LLC is a separate entity for liability protection and it may be taxed like a sole proprietorship, corporation, or a partnership. You only need one member, unless you are being taxed as a partnership, because a minimum of 2 members is required for federal purposes to operate an LLC as a partnership.
A limited liability company consists of members who may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities.
Frequently Asked Questions
Avoiding California Taxes by Incorporating Out-of-State:http://www.ftb.ca.gov/forms/misc/689.pdf