What type business entity should i be

In a general partnership, the partners manage the company and assume responsibility for the partnership's debts and other obligations.

A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners. Unless you expect to have many passive investors, limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities.

If you have two or more partners who want to be actively involved, a general partnership would be much easier to form. One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn't pay tax on its income but "passes through" any profits or losses to the individual partners. At tax time, each partner files a Schedule K-1 form, which indicates his or her share of partnership income, deductions and tax credits.

In addition, each partner is required to report profits from the partnership on his or her individual tax return. Even though the partnership pays no income tax, it must compute its income and report it on a separate informational return, Form Personal liability is a major concern if you use a general partnership to structure your business.

Similar to a sole proprietorship, general partners are personally liable for the partnership's obligations and debt. In addition, each general partner can act on behalf of the partnership, take out loans and make business decisions that will affect and be binding on all the partners if the general partnership agreement permits. Keep in mind that partnerships are more expensive to establish than sole proprietorships because they require more extensive legal and accounting services.

Protect yourself and your business with a partnership agreement. Starting a business with a partner? It may be difficult to talk about problems during your honeymoon stage, but that's exactly when you should. A written partnership agreement helps guide you when questions arise. According to W. Thurston Debnam Jr. Debnam recommends that every business partnership-regardless of the relationship of the individuals-begin with a written agreement. But there's another reason for a partnership agreement.

Using the corporate structure is more complex and expensive than most other business structures. A corporation is an independent legal entity, separate from its owners, and as such, it requires complying with more regulations and tax requirements.

The biggest benefit for a small-business owner who decides to incorporate is the liability protection he or she receives. A corporation's debt is not considered that of its owners, so if you organize your business as a corporation, you're not putting your personal assets at risk.

A corporation also can retain some of its profits, without the owner paying tax on them. Another plus is the ability of a corporation to raise money. A corporation can sell stock, either common or preferred, to raise funds. Corporations also continue indefinitely, even if one of the shareholders dies, sells the shares or becomes disabled. The corporate structure, however, comes with a number of downsides.

A major one is higher costs. Corporations are formed under the laws of each state with their own set of regulations. You'll probably need the assistance of an attorney to guide you through the maze. In addition, because a corporation must follow more complex rules and regulations than a partnership or sole proprietorship, it requires more accounting and tax preparation services. Another drawback: Owners of the corporation pay a double tax on the business's earnings.

Not only are corporations subject to corporate income tax at both the federal and state levels, but any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal income tax returns. To avoid double taxation, you could pay the money out as salaries to you and any other corporate shareholders. A corporation is not required to pay tax on earnings paid as reasonable compensation, and it can deduct the payments as a business expense.

Keep in mind, however, that the IRS has limits on what it believes to be reasonable compensation. How to Incorporate To start the process of incorporating, contact the secretary of state or the state office that is responsible for registering corporations in your state. Ask for instructions, forms and fee schedules on business incorporation. It's possible to file for incorporation without the help of an attorney by using books and software to guide you along.

Your expense will be the cost of these resources, the filing fees, and any other costs associated with incorporating in your state. The disadvantage of going this route is that the process may take you some time to accomplish.

There's also a chance you could miss some small but important detail in your state's law. One of the first steps you must take in the incorporation process is to prepare a certificate or articles of incorporation.

Some states will provide you with a printed form for this, which either you or your attorney can complete. The information requested includes the proposed name of the corporation, the purpose of the corporation, the names and addresses of the parties incorporating, and the location of the principal office of the corporation.

The corporation will also need a set of bylaws that describe in greater detail than the articles how the corporation will run, including the responsibilities of the shareholders, directors and officers; when stockholder meetings will be held; and other details important to running the company. Once your articles of incorporation are accepted, the secretary of state's office will send you a certificate of incorporation.

Once you're incorporated, be sure to follow the rules of incorporation. If you don't, a court can pierce the corporate veil and hold you and the other owners personally liable for the business's debts.

It's important to follow all the corporation rules required by state law. You should keep accurate financial records for the corporation, showing a separation between the corporation's income and expenses and that of the owners'.

The corporation should also issue stock, file annual reports and hold yearly meetings to elect officers and directors, even if they're the same people as the shareholders. Be sure to keep minutes of these meetings. On all references to your business, make certain to identify it as a corporation, using Inc.

You also want to make sure that whomever you deal with, such as your banker or clients, knows that you're an officer of a corporation. The S corporation is more attractive to small-business owners than a standard or C corporation. That's because an S corporation has some appealing tax benefits and still provides business owners with the liability protection of a corporation. With an S corporation, income and losses are passed through to shareholders and included on their individual tax returns.

As a result, there's just one level of federal tax to pay. However, S corporations are still corporations, which means they have many of the same requirements, such as holding meetings and keeping minutes. As a result, you might pay more in tax and accounting services than you would with sole proprietorships or partnerships. Consulting an attorney or financial professional is recommended.

A limited liability company, or LLC, has some great benefits. Consulting a tax professional is recommended. Looking at the pros and cons of each one and talking with a qualified tax and financial expert or attorney about your options, can help you find the one that fits you — and your business — best. Make sure to look into business insurance options to determine the right amount of liability insurance you need.

Use these tips to attract high-quality applicants. Common types of businesses There are five main types of business entities to consider. Partnership When you have one or more partners working with you, a partnership could be the solution. It has no legal distinction from the owner, and usually requires no governmental filing other than a fictitious business name statement "DBA" if the owner is doing business in any name other than a personal name.

A sole proprietorship is probably the most common form of business because it is simple to start and avoids the operating expenses required for other legal entities such as corporations and limited liability companies. Because there is no legal distinction between the owner and the business, a sole proprietor is personally liable for all the debts and obligations of the business. It also means that on the death of the owner, the business enterprise terminates, leaving only the assets of the business such as equipment, accounts receivable, and real property.

Because the assets used in the business are not separated from the other assets of the business owner, it may be difficult to sell the business as a whole after the death of the sole proprietor. For tax purposes, there is no distinction between the sole proprietor and the business. This means that the net income from the business is taxed only once.

A corporation is a separate entity from its owners for both legal and tax purposes. Corporations are formed by filing Articles of Incorporation with the Secretary of State.

A corporation is comprised of three groups of people: shareholders, directors, and officers. The shareholders elect the board of directors who are responsible for setting major goals of the corporation and making major decisions. The board of directors appoints the officers, who run the business on a day-to-day basis. Since a corporation is a separate legal entity, the corporation generally is responsible for the debts and obligations of the business.

In most cases, shareholders are insulated from claims against the corporation. In addition to the limited liability protection enjoyed by shareholders, a corporation offers many other advantages over other types of entities:.

A corporation taxed at the entity level is known as a C corporation. Income that has been taxed at the entity level will again be taxed if, and when, is distributed as dividends to shareholders. This double taxation is, perhaps, the single greatest disadvantage to operating a business as a corporation.

However, S Corporations may avoid much of this double taxation. To elect to be treated as an S Corporation, certain requirements must be met and an election form must be filed with the IRS. The main requirements are:. If a corporation elects to be taxed as an S Corporation and meets the requirements, it will be taxed at the federal level very similarly to partnerships and limited liability companies.

That is, the income, losses, and gains will be passed through directly to the shareholders and there will be no tax "at the entity level.

A limited liability company, or LLC, may be formed by one or more owners, called members. It provides members with limited liability protection for their personal assets in most cases, just as a corporation does for its shareholders. It also offers the members with "pass-through" taxation like a sole proprietorship or partnership, avoiding the potential of double taxation in a C Corporation.

If the LLC has two or more members, they will need to enter into an operating agreement, similar to a partnership agreement, which should be in writing. This often requires the expertise of an attorney to be properly prepared, and adds to the cost of forming an LLC. An LLC may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. One of the main advantages of an LLC over a corporation is the greater flexibility in the management of the business.

An LLC may be managed in the following ways:. There are no restrictions on the type of persons who may be members in an LLC. Further, an LLC, unlike an S Corporation, may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC.

Compared to a corporation, an LLC is a less favorable entity choice as far as raising capital from outside investors or offering ownership interests to employees. The corporation structure has been in existence far longer than the LLC and is better understood with respect to its structure and how ownership interests are represented in stock certificates.

These characteristics have less certainty and may be more difficult to comprehend in an LLC because of the potential complexity of an LLC operating agreement.

When your business has to or more owners, in addition to an LLC, there are two types of partnership entities available: a general partnership or a limited partnership. A limited liability partnership may also be available, but is generally restricted to certain types of professions or occupations and not a general purpose business.