Business Entity Set-Up
In order to carry on a trade or business, a type of business entity must be chosen.
Choice of Business Entities
In order to carry on a trade or business, a type of business entity must be chosen. For all practical purposes, the four major business entities are: sole proprietorship, partnership, corporation, and limited liability company. In some cases, it can be quite complex to coordinate the current and future needs of both the business and its owners.
The advantages and disadvantages of each type of entity from a legal and tax perspective play important roles in the overall planning process.
Definitions of The Four Major Types of Business Entities
A good starting point is to first know what each of the entity choices represent:
SOLE PROPRIETORSHIP: This is a self-employed individual who operates a trade or business where all the tax consequences fall to that proprietor, including all liabilities, debts, profits, and losses.
PARTNERSHIP: An organization or association of two or more participants who carry on a trade or business together, and allocate the ownership and profit/loss aspects according to their contractual terms. This partnership is a separate entity for tax filing purposes, but not tax paying. Rather it is a form of a conduit where income, losses, credits, and certain deductions are passed along to the partners' tax situation instead. There is no liability protection for the general partners.
CORPORATION: A separate, legal entity formed through a state charter using articles of incorporation. It is authorized to perform primarily all the business activities an individual can, including such things as filing and paying taxes, signing contracts, and making loans. It is formed through the issuance of stock or securities. There are two main types: Regular ("C") or Subchapter S ("S").
LIMITED LIABILITY COMPANY (LLC): This is a hybrid, or combination, with some of the features of a partnership and the limited liability aspect of a corporation. The two most significant features of an LLC are that it affords the partners (Members or Managers) some degree of limited liability protection, yet it still acts as a conduit like a regular partnership. LLC's may have a single member, and in these cases the IRS treats it as a Sole Propiertorship for tax puroposes, but the State gives the business liability protection.
We will assist you in determining the proper legal entity for operation of your business based on your particular circumstances.