When starting a new venture, there are a variety of entity choices — although some will be easily ruled out based on your operation. Most entities are governed by state statutes, with federal income tax rules and regulations also coming into play. The six basic entities are:
1. A sole proprietorship is owned by one person, who may also be the only worker. Note that a sole proprietorship is not a separate legal entity. The owner receives all profits, bears all losses, and is personally liable for legal claims that arise from accidents, faulty merchandise, employees, unpaid bills and other business problems.
2. A limited liability company gives owners protection from the claims of business creditors and others. Individual LLC members’ liability for business debts is limited to the value of their interest in the business — hence the name “limited liability.”
3. A C corporation is a legal entity owned by its stockholders united under a common name. Corporations issue stock and elect a board of directors to manage the company. Shareholders have limited liability for the obligations of the business. Corporate income is taxed twice. The corporation distributes its earnings as dividends to stockholders, who must include the dividends as personal income on their tax returns.
4. An S corporation limits the number of stockholders to 100. Many small companies choose this option, because it’s a good way to avoid the double taxation of corporations and also provides limited personal liability for the owners. However, there are some restrictions placed on S corps. For example, there can be only one class of stock and the corporation must be domestic.
5. A not-for-profit organization is set up with a specific mission to improve society, such as a museum, charitable foundation, religious organization, research group or trade association. It is not an option for a regular for-profit business. Not-for-profit organizations generally do not pay taxes on their income, cannot sell stock or pay dividends, and have strict requirements imposed on their activities.
6. A general partnership involves two or more owners who make decisions for the business together. Partners share profits, losses, and liability. Although a partnership can be very informal, it is generally considered a legal entity under applicable state law.
In addition, there are sub-entities within some of the above six categories. Contact us to discuss the options. We can help decide which one is right for your operation.