Most Common Business Entities
Are you thinking about starting a business? If yes, congratulations! It is an exciting step to take. It is also very important that you set up your business structure correctly from the beginning. When starting up your new business, you should talk to a CPA about the different types of business entities available for you and your business. These are the most common forms of entities.
- Sole Proprietorships
- S Corporations
- Limited Liability Company (LLC)
“A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. You do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities. In fact, you may already own one without knowing it. If you are a freelance writer, for example, you are a sole proprietor,” explained by U.S. Small Business Administration.
Entrepreneur.com states that a Partnership is “a legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships”.
The IRS says that “in forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation”.
“S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level,” as stated by the IRS.
Limited Lability Companys (LLCs)
“A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company. Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner. A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs,” described by the IRS.
Many factors such as tax implications, partners, type of business, etc. go into what is the best entity choice for you and your business. Talking through all of them will help you make the right choice.
Joshua Wilson, CPA, PC is a full service public accounting firm that specializes in accounting, tax preparation, tax planning, & business development for small businesses. Give Joshua a call today to set up a consultation at 770-856-1309 or email him at firstname.lastname@example.org.