Of all the choices you make when starting a business, one of the most important is the type of legal organization you select. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Here are the most common business structures:
Sole Proprietor – an individual who owns an unincorporated business by themselves.
Partnership – a relationship where two or more persons join together to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Corporation – a relationship where prospective shareholders exchange money, property, or both, for the corporation’s capital stock. Profits are taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends.
S Corporation – a corporation, meeting certain criteria, that elects to be treated as an S corporation. Generally, an S corporation is exempt from income tax; the shareholders report the S corporation’s income, deductions, losses and credits on their individual tax returns.
Limited Liability Corporation (LLC) – an entity – statutorily authorized in certain states – that is characterized by limited liability for debts similar to that of a corporation, management by members or managers, and pass-through taxation similar to that of a partnership.