Sole proprietorships, partnerships, corporations, S corporations and limited liability companies are the most common types of business organization in the United States. Each business structure has its financial and legal advantages. Choosing the right organizational form can become crucial to the long-term success of the business. You should consult with a lawyer or an accountant to determine the best type of business organization for your company.
A sole proprietor is a low-cost and simple form of business organization. This structure is appropriate for many small, start-up businesses that do not have major exposure to liability. In this form of business organization, the owner has full control over the organization, and he can sell or dissolve the business at any time. A sole proprietor does not have to share profits, and the business owner will only file a single personal tax return that lists the income from the business as personal income.
A partnership is similar to a sole proprietorship, except that it involves two or more people. This type of business is also easy to organize and normally has better management and larger resources because of the multiple participants. Partners divide profits according to their investment and report these profits as income on their personal tax returns. Partners also have personal liability for the business, both jointly and individually.
Corporations offer the advantage of limited financial liability for the owners. This means that the owners of the corporation limit their liability to the investment made in the corporation. The corporation is a separate legal entity that has an indefinite life. The board of directors that represents the company´s stockholders pays taxes and makes the business decisions for the corporation. Shareholders have liability for business debts and obligations of the corporation only to the amount of their investment. Incorporating also allows a company to raise money by issuing stocks and bonds. Businesses organized in corporate form enjoy some tax benefits but, on the other hand, are subject to double taxation. Double taxation occurs with corporations because the corporation pays a tax on profits earned and then the owners or shareholders of the corporation also pay a separate tax on distributions from the company in the form of dividends.
An S corporation has the same basic advantages as a standard corporation. However, the S corporation has the additional benefit of only paying taxes once, so this form of business is not subject to double taxation. Shareholders of S corporations report dividends as personal income, and the S corporation does not pay income taxes on the profits generated. Additionally, the shareholders of an S corporation do not have personally responsibility for any business debt. There exist, however, many restrictions regarding the formation of S corporations, and not all businesses can operate using this form of business organization.
Limited Liability Company
The LLC is similar to an S corporation. However, the IRS imposes fewer restrictions on this business structure. LLCs receive the tax benefits of partnerships and S corporations and also offer limited liability protection against the company´s debts and losses. Additionally, LLCs offer great flexibility in terms of managing and organizing the business. Again, not all types of businesses qualify for registration as a LLC.
- "Business Principles and Management"; James L. Burrow, Brad Kleindl and Kenneth E. Everard; 2007
- Study Finance: Types of Business Organization