When an entrepreneur decides to start a new business, he or she must choose among a variety of business entities. The most common types include a sole proprietorship, partnership, corporation, and limited liability company. They range from easiest to most difficult to start and maintain. Each entity has a specific taxation method, management organization, and liability structure. Among the business entities, proprietorships and partnerships typically have the least protection, while corporations and limited liability companies have more.
A sole proprietorship is the easiest business form to start. An individual simply needs a business license or other credentials provided by the local government. With this information, the individual can set up a business banking account and begin operations. All income earned through the business flows through to the individual’s personal tax return. The business owner has full liability for all his or her actions and the employees who work for the company. Many small, home-based businesses use this organizational form to start operations and may move to a different form later.
Partnerships are the next level among business entities. Partnerships are general or limited; a limited partnership has one individual who provides funds but provides no services for the firm. The company splits income among the partners based on the start-up paperwork filed with the government. All partners are liable for each other’s actions. Income flows through to each partner’s individual tax return.
Corporations may either be C or S in designation. These business entities allow for corporate or personal tax returns, respectively. The entrepreneur will need to file the articles of incorporation with the local government and elect C or S for the new corporation. A C corporation requires that all income filed on a corporate tax return separate to all individuals in the business. S corporations call for income to flow through to personal tax returns; this form is best, in most cases, for small businesses. Both offer full liability coverage, protecting individual assets from business issues.
A limited liability company is a hybrid between the partnership and corporate business entities. It allows for business income to be taxed at personal rates, saving owners money. The company can also have some aspects of a partnership, where activities by each individual may be limited by personal investment levels. Not all governments recognize the limited liability company business form. Starting a business using this form may involve several different complications depending on the type of operations involved in the company.