The Five Most Commonly Used Business Organizations
There are five common types of business organizations. Outlined below you will find the definitions of each type of business and why you might want to choose that type of structure.
The sole proprietorship is for someone who owns a company and is not planning to incorporate or become a limited liability company. This is mainly for a business that will be owned by one individual. That individual may or may not have employees. When you have this type of business structure, you report your business income on your individual tax return. Some of the risks of the sole proprietorship are that your business debts and obligations could be attached to your personal assets, even if they are not directly related to your business.
The second type of structure is a partnership. Usually a partnership will consists of two or more people who want to do business together. Each partner has a fiduciary duty of loyalty and trust to the other partners and put his own interests below the interests of the partnership. Partners have unlimited liability to the business. Creditors can require that liabilities be paid from personal assets. Partnerships report profits or losses on individual income tax returns. Partners are not allowed to sue each other. Usually partnerships require a written partnership agreement.
The third type of structure is a limited partnership. This is made up of at least one or more general partners and at least one or more limited partners. General partners act as the fiduciaries of the business and assume all the monetary risk. All parties can profit from the company. Limited partners assume risk of their contributions and that is all. Limited partners often assume the role of raising capital and do not participate in the day-to-day business operations. Members file their own individual tax returns. The partnership files an information return with the Internal Revenue Service, notifying the IRS of each partner’s share of the year’s profit or loss.
The fourth type of business structure is a corporation. This is the type of organization that is most often used with the term business. Most large businesses are corporations. People can invest in corporations without assuming liability or management responsibilities. Corporations are creations of the state. Corporations have a board of directors and can issue stock. Shareholders are owners of the corporation and have limited liability and are not involved in the day to day operations of the business. A corporation is a legal person and a legal entity separate from its shareholders and managers. A corporation pays state and federal income taxes on its income.
Limited Liability Company
The fifth business structure is a limited liability company or LLC. LLCs are created by filing Articles of Organization with the state in which you live and have one or more “persons” conducting business. One benefit of this organization structure is that no member, manager or employee is personally liable for any debt obligations of the company. The LLC has a tax status of a general partnership with limited liability protection. No annual meetings are required. Members can participate in management more than in a limited partnership. They are responsible for disclosure, record keeping and annual reporting requirements. LLCs are only taxed once and the earnings of a partnership are treated as the earnings of its partners.
This information is intended to be used as a very brief overview of the main types of business structures. Consulting with a CPA or attorney can help you make the final decision about your new business. Protect yourself against unnecessary risks and get your new business off to a good start.
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