Sole proprietorships are the simplest business form. This means the business and the owner are inseparable. A sole proprietorship is subject to “pass through” taxation. This means the profits and losses go through the business and flow into the owner’s personal tax return.
A partnership is a business owned by two or more individuals for profit. Like a sole proprietorship, a partnership is also subject to “pass through” taxation. Partners are taxed on their individual profit share, and on profits reinvested into the business. But, partners may choose a corporate tax treatment for general partnership.
A limited partnership consists of general partners and at least one passive limited partner. For tax purposes, limited partnerships share “pass through” taxation with general partnerships. But deducting business losses can be a different process.
A corporation is a legal entity that is separate from its shareholder owners. This separation results in the protection of shareholders from personal liability.
- C Corporation: The standard C Corporation does not have a “pass-through” taxation. C Corporations go through “double taxation.” After C Corporations deduct various expenses, they must also pay income tax for profits shown on its tax return. Corporate dividends paid to the shareholders are not deducted as business expenses.
- S Corporation: S Corporations are special entities that lack the two-tiered taxation process. They offer limited liability protection and “pass-through” taxation.
Limited Liability Company (LLC)
LLCs offer one-level “pass though” taxation and limited liability protection for business debts. Also, LLCs can elect to be treated as a C Corporation. LLCs are not regulated as heavily as S Corporations. Neither profit shares nor tax burdens have to be based on ownership of stock shares.
Should I Get an Attorney to Help Me Form the Right Business Entity?
Yes. Choosing a business entity is one of the most important decisions an entrepreneur can make. There is no one-size-fits-all solution, and a tax attorney can provide helpful advice.