Types of Business Entities
General Partnership
A business that has 2 or more owners (partners) that equally share all liability towards business debts. Advantages- Like a SP a partnership is easy and inexpensive. Profit and loss is reported on partners personal tax returns. Disadvantages- Partners share the liability for the business debts. This means if one of the partners makes a mistake the other partners are still liable for it.
Limited Liability Company
A newer form of business that combines the taxation methods of a partnership with the limited liability of a corporation. Advantages- Owners have limited personal liability even if they participate in management. LLC's can choose to be taxed as a partnership or corporation. Disadvantages- More expensive to create than a partnership or sole proprietorship. A members whole share of profits could be subject to self-employment tax.
C Corporation
A type of business that is taxed separately from the owners. All owners have limited personal liability. Owners can deduct business expenses and employee benefits. Profit and loss can be split amongst the owners to create a lower tax rate. Disadvantages- More expensive than a partnership or sole proprietorship. There is a lot of paperwork involved. Double taxation on company earnings and the dividends received by the shareholders.
S Corporation
A type of corporation that is generally not taxed separately from the owners. Advantages- Owners have limited personal liability. They can report on their personal returns their share of corporate profit and loss. Corporate loss can be used to offset income from other sources. Disadvantages- More expensive than a partnership or sole proprietorship. More paperwork than a LLC which has similar advantages. Benefits are limited for shareholders that own more than 2% of shares.
Limited Partnership
Similar to a GP however this type of entity has at least one general partner that is personally liable, and one limited partner who has limited liability so long as they do not participate in management. Advantages- The limited partners have limited liability as long as they do not manage. The general partner can raise money without having to get investors involved. Disadvantages- General partners are personally liable for all debts. This type of partnership is more expensive to create. More suitable for real estate investors.
Sole Proprietor
Type of business entity that is owned and run by one person. The business and the owner are legally considered one. Advantages- Easy and at low cost to form and run, owner has complete control over the decision making in the business, no corporate tax payments. Profit and loss is reported on owners personal tax return. Disadvantages- The owner is personally liable for everything even if one the liabilities was the fault of an employee.
