At Lawrence R. Jensen & Associates in California, we represent many entrepreneurs who are starting their own businesses. Consequently, we know how important choosing the proper business entity type can be for a start-up. We therefore thought it would be helpful to review the most common types of business entities here on our blog.
The Internal Revenue Service lists the following as the five most common types of business entities:
- Sole proprietorships
- S Corporations
- Limited Liability companies
If you intend to own your business all by yourself, a sole proprietorship represents your easiest way to go. All you need do is choose the name of your business and start conducting business. Keep in mind, however, that you will pay all your business’s taxes as part of your personal taxes and you will be responsible for all of its debts You can ask the IRS to supply you with an Employer Identification Number, a/k/a EIN, or you can use your own Social Security Number.
You may wish to set up a partnership if you intend for someone else to co-own your business. You will need a partnership agreement that sets out each partner’s ownership share, which business liabilities (s)he will be responsible for, and which business duties (s)he will assume. When it comes time to pay taxes, your partnership need file only an informational return. The business taxes must be paid by the partners as part of your respective personal returns.
Corporations are stand-alone legal entities, distinctly separate from their stockholders. This gives you and the other stockholders limited personal liability for the corporation’s debts and expenses. You will need to file your Articles of Incorporation with the Secretary of State’s Office, as well as your by-laws. You likewise will need to purchase a corporate seal. Your corporation will file an annual report with the Secretary of State’s Office and will pay its own income taxes. However, each shareholder will personally pay his or her share of the corporation’s profits according to the dividends (s)he receives.
An S Corporation represents a hybrid between a partnership and a corporation. When you elect to become an S Corporation, you no longer are double taxed and you still have limited liability.
Limited liability company
A limited liability company, usually referred to as an LLC, is another way to achieve limited liability. You and the other shareholders will not be liable for your business’s debts should it go bankrupt, but each of you will also pay your share of the LLC’s income taxes.
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