Types of business structures
A sole proprietorship is a business structure owned by only one individual or a married couple. In this type of entity, there’s no legal distinction between the owner and the business. The owner is entitled to all the profits of the business, and he/she is responsible for the losses, liabilities, and debts the business will incur. A sole proprietorship files form 1040 and reports on schedule C all profits and losses for the business.
A sole proprietorship is the most common type of business and the easiest to set up. Since the business does not become a legal entity separate from the owner, it can operate under the name of the proprietor. It is also possible to register a fictitious name for it, like A & B market but the fictitious name is simply a trade name; it does not establish an independent entity.
General Partnership (Limited and General)
A General Partnership is very similar to a Sole Proprietorship. However, a General Partnership is composed of 2 or more persons who agree to contribute money, labor, or skill to a business. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for debts of the partnership.
One can also form a limited partnership where the limited partner may not be involved in the day-to-day management of the business and less liable for certain obligations of the business. Partnerships file an informational tax form 1065 and all income and loses. Each partner receives a K1 according to their percentage of ownership in the business. All partners are taxed on their shares of the income/loss of the partnership on their personal tax returns.
A Corporation is a more complex business structure. A corporation is a legal entity created by individuals, or shareholders, with the purpose of operating for profit. The creation involves a legal process called incorporation where legal documents containing the primary purpose of the business, name and location, and the number of shares and types of stock issued, are drafted and filed with the state agency. A corporation may have certain tax advantages for the business in many cases vs. a non corporate business. However, consult a tax professional for your particular situation.
The process of incorporation gives the business entity a distinct feature that protects its owners from being personally liable in the event of a lawsuit or legal claim.
S Corporation is filed in the same way as a C Corporation but is different in owner limitation and tax purposes. One files for a C corporation and can elect to become a Sub-chapter S Corporation by filing form 2553 with the I.R.S. An S Corporation consists of up to 100 shareholders and is not taxed as a separate entity. Rather, all the profits/losses are calculated by the shareholders on their personal income tax returns.
A nonprofit corporation does not intend to make a profit, but rather donates all revenue to other organizations or individuals. Many nonprofits serve the public interest, but some engage in private sector activities. A charity would incorporate as a nonprofit and, ultimately, apply for tax exempt status. By having tax exempt status, all donations can be recorded by donors as not taxable by both the federal and state government. Most nonprofit corporations must file form 990 annually.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is formed by 1 or more individuals or entities through a special written agreement. LLC is the least complex business structure. Unlike a s corporation or a c corporation, the structure of an LLC is flexible. A LLC can elect to be taxed as either a Sole Proprietorship, C corporation or a S corporation. It is a business structure that can combine the benefits of a pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
A Trust is a legal three party financial agreement, in which one person, called the trustee, holds assets for the benefit of another person, called the beneficiary. A trustee is responsible for managing the trust that the grantor has appointed . They are the person who is in charge of managing the property or assets the given them to keep, and are titled in the agreement. A trust that generates $600 or more during the year must file form 1041.