If you have started a business as an independent consultant for other companies or if you offer products and services to the general public, choosing the right business structure should be a top priority. Depending on whether you are the sole owner or have a partner or company investors, the type of entity you select can have significant tax and legal ramifications. The following outlines five common types of business structures, and some of the benefits associated with each.
Common Types of Business Entities
The U.S. Small Business Administration (SBA) advises that you should use care in selecting a structure for your business, as the type of entity you choose will impact how your business is taxed and when you report any profits or losses. The following are the five most common types of business entities:
Sole Proprietorship
The is a business in which you are the sole owner, and you may operate under your own name or select a company name for branding purposes. While a sole proprietorship offers a simplified tax process, in which any income you generate is listed on your own personal taxes, you also assume unlimited personal liability.
Partnerships
There are three main types of partnerships: a general partnership, in which profits and liabilities are shared equally between the partners, a limited partnership, in which each has limited investment and liability, or a joint venture, which acts as a general partnership for limited projects. Under Internal Revenue Service business entity guidelines, you must file an annual information return to report profits, losses, and expenses, but any income earned is reported directly through each partner’s tax return.
Corporations
A corporation is an independent legal entity. While it is owned by shareholders, the corporation itself assumes all legal liability. It is also a single tax paying entity, with any profits or losses are assumed by the corporation. This type of business is double taxed, one when income is earned, then again when dividends are paid to shareholders.
S Corporation
An S corporation remains an independent legal entity but avoids double taxation by passing profits and losses directly to shareholders. From these amounts, shareholders are required to claim reasonable compensation, which is reported as income on their personal tax returns.
Limited Liability Company (LLC)
An LLC is created by state statutes, and each state has its own way of regulating them. Owners are considered as ‘members’ of the LLC, and report profits and losses on the personal tax returns, while being protected against personal liability.
Contact an Oklahoma City Business Attorney Today.
Do you need a business attorney to help you set up your business? Contact Robert R. Robles Attorney at Law today, either via our online form or by calling 405-232-7980.
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