This article provides an overview of common types of business entities.
When starting a business it is important to select the type of organization that best fits your needs. Understanding the legal and tax consequences of each is important to selecting the right type of entity for your business. This article provides a brief overview of two of the most common and simplest business structures.
A sole proprietorship is the most basic type of business structure. It is also the most common. A sole proprietorship is a business owned by one person. There is no distinction between the owner and the business: the owner is entitled to all profits and is liable on all debts of the business. While this has the advantage of giving the owner complete control over all business decisions, it has the disadvantage of unlimited personal liability for the owner.
While no formal steps need to be taken to form a sole proprietorship - it is formed merely by the act of one person going in to business - certain licenses and permits will most likely need to be obtained. A lawyer can help and provide advice in this area.
Because in a sole proprietorship the business and the owner are the same, the business is not taxed separately from the owner. This simple, straightforward tax treatment is one of the advantages of a sole proprietorship.
Unlike a sole proprietorship, a partnership is formed when two or more people agree to go into business together. Partnerships can be general, limited or a joint venture. In general partnerships, unless otherwise agreed, partners share equally in the management of the business as well as in the business's profits and losses. A joint venture is similar to a general partnership except that it's limited to a specific project, period of time or both. In a limited partnership, on the other hand, the partners setup the business in such a way that their liability is limited. Similarly, their decision-making and management duties can be limited.
To form a partnership, its organizers must pick a name and register that name with the Secretary of State. Various licenses and permits to do business will also most likely need to be obtained. An attorney can help with these requirements.
Like a sole proprietorship, a partnership is not taxed. Rather, the taxation passes to the individual partners and is reported on each of their individual income tax returns.
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