First, read through the business structures information on the Internal Revenue
ID: 2491307 • Letter: F
Question
First, read through the business structures information on the Internal Revenue Service (IRS) website. Then, in your initial post, compare and contrast the partnership business structure with your selection of the C corporation, S corporation, or LLC. Discuss the pros and cons of each, and include an explanation of the tax advantages between them. Give an example of a type of company that should choose each business structure and explain why it is the best choice. You must include at least one scholarly source in addition to your textbook and the IRS website to support your post.
Explanation / Answer
Of all the choices you make when starting a business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.
This fact sheet provides a quick look at the differences between the most common forms of business entities.
The most common forms of businesses are:
The type of business entity you choose will depend on:
Liability
Taxation
Recordkeeping
Sole Proprietorship
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. In general, the owner is also personally liable for all financial obligations and debts of the business. (State law may also govern this area depending on the state.) This includes operating a:
Shop or retail trade business
Large company with employees
Home based business
One person consulting firm
Partnership
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Each partner reports his share of the partnership net profit or loss on his personal Form 1040 tax return. Partners must report their share of partnership income even if a distribution is not made.
Corporation
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership.
Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.
The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions my exist under state law.)
Limited Liability Company
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLCs are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. Most states also permit “single member” LLCs, those having only one owner.
Which structure best suits your business?
One form is not necessarily better than any other. Each business owner must asses his or her own needs. It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.
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