The primary benefit of a sole proprietorship is that the owner has complete control over the business. In a sole proprietorship all of the profits are received by the owner, and all of the obligations rests solely with the owner. This form of business provides no protection for liability of the business to be held against the individual owner. Additionally, there are potential differences and pitfalls in regards to income tax rates of an individual versus other business entity models.
There are many different types of corporations one can create when choosing this type of business formation. The primary difference between a corporation and a sole proprietorship is that a corporation is owned by the shareholders. A corporation can have a single shareholder or can have many shareholders. Similarly, a corporation can have many officers or a single person in the role of different officers. Depending upon certain criteria, you may choose to operate as a “S Corporation” which is called a small business Corporation. One of the benefits of an “S Corporation” is that it is taxed like a partnership for federal tax purposes. There are certain protections for the individuals with in a Corporation.
Limited Liability Company (LLC)
There are many considerations that go into choosing a Limited Liability Company. These can be viewed as a mix between a corporation and a partnership. These resemble a Corporation in regards to the liability protection, however, you can choose to be taxed as a partnership. This flexibility makes this a good choice for a lot of new businesses. Limited liability companies can have a single or multiple managers and/or members. They are controlled in accordance with operating agreements that are created at the outset of this business formation.
A General Partnership is the type of business entity most people picture when they think of a partnership. This is generally created when two or more people intend to enter into a for-profit business. Unfortunately, there is minimal protection from liability. In the event of a liability issue both would be found liable as individuals and jointly, for all partnership obligations. The income of the partnership flows down to the individual partners who must claim the profits on their personal tax returns. When a disagreement arises in a partnership often the result is a dissolution of the partnership, so trust and compatibility are critical between the partners. It is also necessary to include as much detail as possible in the initial agreement to avoid major issues at a later date.
This type of business entity consists of multiple people engage in a single business entity. A limited partnership has at least one general partner who handles management decisions and you also assumes personal responsibility for the liabilities of the partnership. There must also be at least one other partner who does not participate in the management of the business, and their liability is limited to their contribution to the business. Like a general partnership the profits passed down to the partners and is claimed on their individual tax returns. There is no partnership tax return.
Limited Liability Partnerships (LLP)
Limited liability partnerships Re: most commonly utilized for professional partnerships, such as the practice of law. Limited liability partnerships must maintain insurance as required by law. Similar to the other partnerships there is no partnership tax, however the profits are reported on the individual partners tax returns.