Common Business Entities

If you are starting a business, there are several options available and important decisions to be made. What follows is a general overview of the common types of business entities: the sole proprietorship, the corporation, the partnership and the limited liability company.

A sole proprietor conducts business under the name of a business entity, but there is no legal distinction between the business and owner. The owner is taxed for all company operations and the owner has no protection from the liability of the business entity.

Corporations are owned by shareholders and offer the shareholders certain protection from the liabilities (including law suits) of the corporation itself. There are two common types of corporations, C-Corporations and S-Corporations, named for the subchapter of the Internal Revenue Code under which they operate. C-corporations are taxed both at the corporate level and at the shareholder level, resulting in double taxation of corporate profits. An S-corporation (for which special requirements must be met), will be taxed at the shareholder level only, similar to a partnership. Corporations are owned by their shareholders and offer extensive protection against liability to the shareholders.

A partnership is an association of persons interested in a common business venture. Generally, the partners are taxed for the profits of a partnership and are responsible for the liabilities of the partnership in proportion to their ownership. An exception is certain limited liability partnership where the partners’ liability may be limited to general partners actively participating in the management of the business.

The limited liability company, commonly referred to as the “LLC,” is a relatively new business entity. LLC’s retain the taxation characteristics of a partnership while offering all members protection from the liabilities of the LLC. In addition, the LLC has flexible requirements for formation and operation. While relatively new, limited liability companies are an increasingly popular business entity.

Choosing and forming the proper entity are important steps in your venture, but it is equally important to properly maintain your business entity. Failure to properly maintain and operate the business entity chosen can result in personal liability and adverse tax consequences. Unfortunately, some entrepreneurs establish a business and subsequently fail to preserve its legal structure. This may result in adverse tax consequences and a loss of protections from liability.

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