Business Entities

Choosing which type of business entity your company should become is one of the most fundamental aspects of starting a new business. There are many benefits to each type of structure. Corporations offer self-employment tax savings, have continuous life, and make raising capital and transferring ownership much easier. On the other hand, sole proprietorships and partnerships cost less to establish and have minimal formalities. The following are brief descriptions of the most common types of business entities:

• A sole proprietorship is owned and run by one individual. There is no legal distinction between the owner and the business. All profits and all losses accrue to the owner and are reported on their individual tax return. All assets of the business are owned by the proprietor and all debts of the business are the responsibility of the proprietor. The owner has no lesser liability than if he was acting as individual instead of a business.
• A partnership consists of two or more persons who operate a business together. A partnership is unincorporated businesses organization in which multiple individuals, called general partners, manage the business and are liable for its debts. Other individuals called limited partners may invest but not be directly involved in management and are liable only to the extent of their investments. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax returns. It should be noted that there are various types of partnership structures and each type affects your personal liability and/or tax obligations differently. For additional information on what type is best for you, we recommend you consult a qualified accountant or attorney.
• Finally, a corporation is an entity that is granted a charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members. An important feature of a corporation is limited liability. A corporation's liability is limited to the amount of assets in the business and generally shareholders have no personal liability for the obligations of the corporation. A corporation is recognized as a separate tax-paying entity and must pay taxes on earnings at the corporate level. Shareholders of the corporation are taxed at the individual level on the dividends the corporation distributes to them. This creates "double taxation" and is one of the disadvantages of forming your business as a corporation.

For more information, or to find out which structure best suits you and your needs visit www.irs.gov.