Business Types & Structures

Sole Proprietorships

A sole proprietorship is the simplest form of business you can get. It is relatively easy and inexpensive to set up as one owner runs it. A sole proprietorship is not considered a legal entity, as the company has no separate identity from the owner under the law. All contracts and business documents are instead signed in the owner’s name. This gives the owner complete control over their business. The owner earns all income from the company and is in charge of all business decisions. The major drawback to this control is that the owner is also responsible for all debts and liabilities to the company. Any lawsuit against the company can be a lawsuit against the owner. Because owners can mix their personal and business assets, in case of a lawsuit, an owner’s personal assets can be targeted, as there is no separate identity between the company and the business owner.

Partnerships

A partnership is the simplest structure in which two people can own a business together. Partnerships exist when two individuals or companies become business partners. Because of their simple structure, they share many of the same attributes as sole proprietorships. Partnerships are the same idea but consist of having two owners instead of one. Having two partners can be an advantage as it means double the initial investments of a sole proprietorship. Instead, two contributors invest money, time, and resources into the business, increasing business capital. These partners have equal control of the company and share the responsibility and profits of the business. However, like sole proprietorships, partnerships are also not separate legal entities. Both partnership owners are liable for any debts or losses to the company. Another downside of a partnership is when a partner leaves, it results in the termination of the partnership. Therefore, it is good to prepare for all possible situations in the event of partnership termination.

Corporations

Corporations are the largest and most complex form of business. Corporations are considered separate legal entities and therefore have legal rights separate from their owners, unlike sole proprietorships and partnerships. Instead, the business is treated as if it’s its own person. Among these corporations, there are two main types – C corps and S corps.

S Corps

S corps, on the other hand, are taxed a little bit differently. These corporations can avoid double taxation as they are considered “pass-through entities.” S corps file a tax return form (Form 1120S), yet do not pay income tax at the corporate level. Instead, income tax is paid solely through the shareholder’s personal tax returns. To become an S corp, the business must file an additional form (IRS Form 2553) to be allowed the different taxation process at the federal level. Another difference that sets apart S corps from C corps is that S corps limit the number of shareholders to no more than 100 people, and require all shareholders to be US citizens. However, similar to C corps, all shareholders are granted liability protection from any company debts or losses, meaning shareholders are not personally subject to the financial obligation for business matters.