Entrepreneurs must choose from various business entities, including sole proprietorship, partnership, corporation, and limited liability company. Each has a specific tax method, management organization, and accountability structure. Sole proprietorship is the easiest to start, while limited liability companies offer the most protection.
When an entrepreneur decides to start a new business, he has to choose from a variety of business entities. The most common types include a sole proprietorship, partnership, corporation, and limited liability company. They range from the simplest to the most difficult to start and maintain. Each entity has a specific tax method, management organization and accountability structure. Among corporate entities, corporations and partnerships generally have the least protection, while corporations and limited liability companies have the most.
A sole proprietorship is the easiest form of business to start. An individual simply needs a business license or other credential provided by the local government. With this information, the individual can set up a business bank account and begin operations. All income earned through the business flows through the individual’s personal tax return. The owner of the company bears full responsibility for all actions of him and the employees working for the company. Many home-based small businesses use this organizational form to kick-start operations and may switch to a different form later.
Partnerships are the next level between business entities. Partnerships are general or limited; a limited partnership has one person who provides funds but does not provide services for the business. The company divides the income among the partners based on startup paperwork filed with the government. All partners are responsible for each other’s actions. The income goes through the individual tax return of each partner.
Corporations may be C or S in designation. These corporate entities allow corporate or personal tax returns, respectively. The business owner will need to file the charter with the local government and elect C or S for the new company. AC Corporation requires that all income filed on a corporate income tax return be separate from all individuals in the business. S corporations ask for income to flow through personal tax returns; this form is best, in most cases, for small businesses. Both offer comprehensive liability coverage, protecting individual assets from business problems.
A limited liability company is a hybrid between partnership and corporation. It allows you to tax corporate income at personal rates, saving the owners money. The company may also have some aspects of a partnership, where each individual’s assets may be limited by personal investment levels. Not all governments recognize the commercial form of the limited liability company. Starting a business using this form can involve several complications depending on the type of operations involved in the business.
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