What is the Most Common Type of Corporation?
Identifying the type of business entity to form is one of the first and most important decisions to make when establishing a business.3 min read
What is the most common type of corporation available to business owners? The most common business entities include:
- Sole Proprietorships or "DBA"
- Limited Liability Companies (LLC)
- Professional Entities
Identifying the type of business entity to form is one of the first and most important decisions to make when establishing a business. The business structure you choose will affect the company's legal and tax status.
A sole proprietorship, also called a DBA (abbreviation of "doing business as") is the most basic and cheapest business structure an entrepreneur can choose when forming an enterprise. It's unincorporated and owned and operated by a single person. There is no distinction between the owner and the business. All the business profits belong to the owner. He or she is also responsible for the company's losses, debts, and obligations.
Because there is no distinction between the sole proprietorship and its owner, the business is not taxed separately. Rather, the sole proprietor files the company's profits or losses with his or her tax returns. If the sole proprietorship intends to operate under an assumed name, then it must file an assumed name certificate with the county clerk of the county where the physical business office is located. If the business has no premises, then it should file an assumed name certificate in all the counties where it operates under the assumed name.
One disadvantage of a sole proprietorship is that it exposes the owner to the company's liabilities. The sole proprietor's assets can be used to settle the company's debts and obligations. Further, sole proprietorships can have difficulty raising capital, as most investors want to become part owners of a business if they invest in it.
A partnership is a structure in which two or more people decide to form a business. Typically, each partner invests their money, skills, property, and labor into the business and receives their share of the company's profits or losses. There are three primary forms of partnerships:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
General Partnerships: In this type of partnership, the partners share managerial duties and liabilities equally. Additionally, partners are liable for their actions. The actions of other partners and the personal assets of all partners can be used to settle the partnership's obligations and debts.
Limited Partnerships: Here, the partners' liability is limited to their investment in the company, but this also limits their control of the company. A limited partnership requires a minimum of one general partner with unlimited liability.
Limited Liability Partnerships: These have the same structure as general partnerships but offer partners protection against the partnership's liabilities. Its name must include "Registered Limited Liability Company" or the abbreviation "LLP."
A partnership business does not pay income tax, but it must file an annual information return detailing the income, profits, losses, deductions, and other expenses from its revenue. The IRS treats partnerships as pass-through entities, meaning they pass profits and losses to partners who file these along with their income tax returns.
A corporation is a business structure that exists as an independent legal entity separate from its owners, who are also known as shareholders. Because a corporation is an independent legal entity, it is legally responsible for its debts and obligations, and it can sue and be sued. Shareholders choose individuals to serve on the corporation's board of directors. The board of directors:
- Makes strategic decisions.
- Formulates and executes policies.
- Appoints the corporation's officers, including the president, treasurer, and secretary that run the company on a daily basis.
A corporation is a legal entity that offers limited liability, centralized management, continuity, and flexible transfer of ownership. Corporations must maintain certain corporate formalities, such as:
- Maintaining an office and registered agent in the state of incorporation.
- Drafting of bylaws.
- Issuing stock certificates to shareholders.
- Holding at least one shareholder and directors meeting each year.
- Keeping minutes of shareholders and directors meetings.
- Filing the corporation's tax returns.
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