Most Common Types of Business Entities

In the United States, there are two main categories of business entities. The first category consists of businesses that are filed at the local county clerk's office. The second category consists of businesses that are filed with the office of the state government or filed with the Secretary of State. 

Corporations and limited liability companies (LLC) are the most common types of business entities in the United States. Every US corporation needs to have a federal tax return on file. In many states, it is required for corporations to file a tax return every year.

The simplest type of business is the sole proprietorship. The sole proprietorship refers to a business that is controlled and owned by just one person. The sole proprietorship is responsible for all profit, loss, and liability. The sole proprietorship is responsible for the overall business.

Sole proprietorships have few tax aspects, are inexpensive, easy to disband, and have few formalities that need to be followed. Basic bookkeeping are the main formalities that need to be followed when it comes to sole proprietorships. For sole proprietorships, the liabilities are viewed as the personal liabilities of the business's owner. Upon the death of the owner, the sole proprietorship closes immediately. 

A partnership refers to an association of at least two persons. In this context, a person can refer to people, partnerships, LLCs, corporations, trusts, and more. The purpose of the association is to work together as co-owners to run a for-profit business.

It is relatively inexpensive to form a partnership. The partners will join and the taxation and liability to the partnership can get complex. However, the partnership is not subject to taxes.

The three types of partnerships are as follows:

  • General partnership
  • Joint venture
  • Limited partnership

General partnership operates under the assumption of equal partnership and equal management, ownership, and liability distributed between the partners. However, there are exceptions to this rule.

When it comes to a limited partnership, at least one of the general partners is responsible for managing the business and is personally liable for the debts incurred by the partnership. The other limited partners contribute capital to the business and share profits but are not responsible for running the business. These limited partners are also not liable for any other obligations outside of contribution.

Joint venture is a partnership that is time-based when at least two individuals work together for a certain amount of time or a certain project. Upon completion of the project or when the duration of time is over, the joint venture is dissolved. The individuals will need to register as general partners if they want to keep working together after the dissolution of the joint venture.

Tax Choices

When a business corporation is first formed, it is considered a "C" corporation. However, if the shareholders are willing and qualified, the corporation can choose to become an S corporation. Shareholders should consider the advantages and disadvantages of this decision before making an election.

Tax ruling is complicated yet flexible for a limited liability company (LLC). An LLC with just one member is not in existence when it comes to federal tax purposes under the default rules. An LLC with more than one member is considered a partnership. If such an LLC decides to file an IRS form, the LLC can choose to become an S or C corporation for tax purposes.

Both nonresident- and resident-owned corporations face an identical tax rate. However, corporations that are foreign-controlled have to file more information on the tax return. 

LLCs are automatically fiscally-transparent, which can be an issue for companies that are non-resident-owned.

Liability Protection

Liability simply means that a shareholder, owner, partner, or member is responsible for paying unpaid bills or paying any incurred costs of a court case lost by the company. These individuals will have to use their personal assets or funds to pay for the unpaid bills or costs.

For a corporation, a shareholder is only liable when it comes to the amount of capital they have opted to invest in a company.

If the share capital is not paid in full and the corporation files for bankruptcy, the shareholders may be responsible for paying the rest of the share capital.

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