Posted on Thursday 9 April 2009
When you make the decision to incorporate your business, it is important to decide what structure your business assumes. Each structure has different limitations and liabilities, therefore you must figure out what is best for your business needs. Your accountant or attorney can help you decide what type of business structure best fits. Below are the types of entities to consider.
Sole Proprietorship
A sole proprietorship is the simplest form of business entity with the least amount of legal formalities. There is no procedure to form a sole proprietorship and there are few accounting requirements. In a proprietorship, the single owner assumes sole responsibility for the operations and finances of the business, including profit and loss. In the proprietorship type of business entity, the owner’s personal property is tied directly to the business; therefore, the owner assumes unlimited risk of his personal assets.
General Partnership
General Partnerships require an agreement between two or more individuals or entities to jointly own and operate a business. A partnership operates from a tax perspective as a “pass through†entity which means that all items of income and deductions pass through the partnership to the partners according to percentage of ownership or partnership agreement. 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, while individual partners report their share of profits and losses on their personal return. Short term partnerships are also known as joint ventures.
Limited Partnership
A limited partnership is a form of business organization that offers some of the partner’s limited liability. It consists of a general partner who organizes and manages the partnership and its operations, and limited partners who contribute capital but have limited liability and assume no active role in day-to-day business affairs.
Limited Liability Partnership
LLP’s are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLP’s are not recognized by every state and those that do, sometimes limit LLP’s to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns.
“C†Corporation
Corporations are a separate entity from its owners. Corporations provide the shareholders with the most protection from liability and responsibility from debts and contracts. Profits for a corporation are taxed at the corporate level when the income is earned and is also taxed at the individual shareholder level. This protects the owner most from any issues that may arise so that the owner’s personal properties are not at risk.
“S” Corporation
An “S” Corporation is similar to a corporation in that it provides its shareholders with protection from liability. However, unlike a corporation, an “S” corporation is exempt from federal income tax. Instead the taxes are paid solely by the individual shareholders.
Limited Liability Company
A Limited Liability Company (LLC) is a combination of the corporate and partnership forms of business. In an LLC, parties control shares of the company and like corporations, their liability for the operations of the company is determined by their level of investment. However, like partnerships, income tax is not paid at the LLC level, but rather it is “passed through” and taxed at the shareholder level.
TAGS: Incorporate a Business,
limited Liability Company LLC
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