Sole Proprietorships and Partnerships
For many businesses, this is the best initial structure. A sole proprietorship is a one-person business where the owner and the business are one and the same. This means all your income and losses are reported on your personal tax return instead of filing a separate for your business. The downside is that you are personally liable for business-related obligations. If your company gets sued, you get sued. There is no legal separation to protect your assets from those of the company.
A partnership is similar in structure. It is simply a sole proprietor business owned by two or more people. No paperwork needs to be filed to create a partnership. In a partnership, each member pays a portion of the taxes on their personal income tax returns based upon the percentage of the business they own.
Sole proprietorships and partnerships are best when personal liability isn’t a big worry.
Limited Partnerships
Limited partnerships are not recommended for the average business owner because they are complicated to set up and run. Limited partnerships are characterized by having one general partner who operates the company on behalf of partners who have invested in the company. The general partner is still personally liable for all business debts.
Limited Liability Corporation
Unlike a sole proprietorship or partnership, a Limited Liability Corporation (LLC) limits the personal liability of the owner or owners. An LLC is treated as an independent legal entity under the law. As such, only its assets are exposed to legal action. When it comes to taxes, owners still pay LLC taxes using their personal returns.
Corporation
Like LLCs, corporations are treated as a separate legal and tax entity. It is separate from those who own, run or mange the company. In contrast to an LLC, owners of a corporation don’t use their personal taxes to report company income. The corporation pays taxes separately. The owner is treated as an employee where money is drawn from the corporation in the form of salaries, bonuses and other compensation.
Corporations and LLCs are perfect for business owners who may be exposed to the possibility of lawsuits, run the risk of piling up a lot of debts or who have sizable personal assets they want to protect from business creditors or the legal system.
Nonprofit Corporation
A nonprofit corporation operates much like a traditional corporation. The main difference is that it is formed to carry out a charitable, educational, religious, literary or scientific purpose. In contrast to corporations, nonprofits can solicit funds through grants and donations from corporations and individuals. Federal and state governments do not tax nonprofit corporations in the same manner either, as the monies raised benefit society.
