What different types of business structures are available?

Many businesses start as a Sole Proprietorship and grow from there.

Basic Definitions:

• Sole Proprietorship: The simplest structure, the sole proprietorship usually involves one individual who owns and operates the enterprise. Expenses and income from the business are included on your personal income tax return, form 1040. Profits and losses are recorded on a Schedule C, which is filed with your 1040. This structure means you are personally responsible for your company’s liabilities; your personal assets could be seized to satisfy a business debt or legal claim filed against you.


• Partnership: A structure owned and operated by several individuals. General partners own and operate the business and assume liability for the partnership. Limited partners serve as investors only; they don’t have any control over the company and aren’t subject to the same liabilities as general partners. Limited partnerships require much more paperwork to form. Partnerships “pass through” profits or losses to the individual partners and use a Schedule K-1 of Form 1065. Like sole proprietorships, partnerships are also liable for business obligations and debts; personal liability is a concern. Additionally, partnerships require more legal and accounting services than sole proprietorships.


• Corporation: A separate legal entity; requires more regulations and tax requirements. This structure protects personal assets, as a corporation’s debt is separate from that of its owners. The corporation is able to sell stock to raise funds. Corporations cost more, however. They are formed under the laws of the state in which it operates; each state has its own set of regulations. Typically, more accounting and tax preparation services are required, as it is more complicated. Another drawback is that owners pay a double tax on the business earnings. Income is taxed at the corporate level, and then again if earnings are distributed to shareholders.
  
  
  
  • S Corporation: More attractive to small business owners than the C-Corp. The S-corp allows income and losses to be passed through to shareholders, avoiding the double taxation referred to above.
  
  
  
  


• LLC (Limited Liability Company): A hybrid entity that combines some of the best features of partnerships and corporations. Think liability protection without double taxation how to start a corporation. Profit and losses pass through to owners to be included on individual personal tax returns. LLCs can get more complicated if you operate in different states; be sure to use a professional to fully

This matrix makes it a little easier to visualize the differences and how they can affect you:

Looking for more information? The US Small Business Administration has a good article if you’d like to learn more.

Questions? Contact a professional at 411Corporations today!