SELECTING A BUSINESS ENTITY
One of the first steps when starting a business is selecting a business entity. Generally the main issues are business control, liability and taxes. The following is a summary of the business entity types. I always recommend consulting with an attorney about liability issues or CPA about tax issues if you have any questions related to the business entity selection. It is much easier and cheaper to select the correct business entity than to undo a mistake.
Sole Proprietorship
ControlOwner has complete control over the business entity and is responsible for all decisions related to the business.LiabilityOwner is solely liable. His or her personal assets and any business assets are open to attachment in any legal case.TaxOwner reports all business incomes and expenses on personal income tax return.ContinuityBusiness terminates upon the owner's death or withdrawal. Owner can sell the business but will no longer remain the sole proprietor.General Partnership
ControlEach partner has the authority to enter into contracts and make business decisions in accordance with the partnership agreement.LiabilityEach partner is personally liable for all business debts.TaxEach partner reports partnership income on their individual income tax returns. The partnership business entity does not pay any taxes but is required to file an informational tax return.ContinuityUnless the partnership agreement stipulates otherwise, a partnership business entity dissolves upon the death or withdrawal of a partner.Limited Partnership
ControlGeneral partners control the business and are responsible for all business decisions.LiabilityGeneral partners are personally responsible for partnership liabilities. Limited partners are only liable for the amount of their investment.TaxThe partnership business entity is required to file an informational tax return, but does not pay income taxes. Each limited and general partner reports their share of partnership income or loss on their individual income tax returns.ContinuityDeath of a limited partner does not dissolve business, but death of the general partner might. The partnership agreement generally contains provisions about the dissolution of the limited partnership.Limited Liability Company
Control The owner or partners have control and authority over all the business decisions.LiabilityPartners are not liable for business debts.TaxThe owner or partners report LLC income on their individual tax returns. The Limited liability company business entity is required to file an informational tax return, but does not pay income taxes.ContinuityDifferent states have different laws regarding the continuity of LLC's.Corporations
ControlShareholders appoint the board of directors, who in turn appoints officers. The officers hold the highest authority. Officers and the board of directors are responsible for the decisions of the corporation.LiabilityOffers liability protection. A corporation's debt is not considered that of its owners. Owners can be liable for the business debt when they do not follow the laws about making and approving business decisions. This is know as piercing the corporate veil.TaxThe corporation files and pays income taxes. Shareholders only pay taxes on the dividends they received from the corporation.ContinuityThe corporation is its own legal entity and can survive the deaths of owners, partners and shareholders.S Corporations
ControlShareholders appoint the board of directors, who in turn appoints officers. The officers hold the highest authority. Officers and the board of directors are responsible for the decisions of the corporation.LiabilityOffers liability protection. A corporation's debt is not considered that of its owners. Owners can be liable for the business debt when they do not follow the laws about making and approving business decisions. This is know as piercing the corporate veil.TaxShareholders report their share of corporate profit or loss on their individual income tax returns. The S Corporation business entity is required to file an informational tax return, but does not pay income taxes.ContinuityThe corporation is its own legal entity and can survive the deaths of owners, partners and shareholders.
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