The Most Common Forms of Business Ownership
You’ve decided to open your own business and become your own boss and that’s a great start to many future adventures. Hopefully, you’ve hired an attorney who is familiar with business law to help you navigate through the different decisions and government agencies that you’ll be dealing with on at least an annual basis.
You’ve completed your business plan, acquired a nice nest egg to tide you over until your new business starts making money and you’ve applied for your Employer Identification Number (EIN).
One of the most important decisions you’ll make during your start-up phase will be which type of business entity or organization you set up for your company. This decision will impact the entire future of your business. It will affect the amount of paperwork you’re legally required to do, your personal liability, how much you pay in taxes, and your ability to borrow money. State law controls the formation of your business and federal tax law controls how your business is taxed.
The most common forms of businesses are:
Sole Proprietorships
Partnerships
Corporations
Limited Liability Companies (LLC)
Subchapter S Corporation is recognized by the Federal tax law
Let’s start with the basics. All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.
The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each business owner.
The type of business entity you choose will depend on:
- Liability
- Taxation
- Recordkeeping
For more information go to:
Next in our business series – Sole Proprietorships, Partnerships and Corporations.
The information found on the Gerstenberger Law site is for educational purposes only. Your situation and the situation of others is unique and more complex. This is neither legal advice nor to be considered legal advice. Contact us for advice about your specific situation.
