Common Business Structures
The single owner of a business is a sole proprietor. The single owner has sole control and responsibility. The sole proprietorship is easily formed, allows important decisions to be made quickly, and may enjoy fewer legal restrictions. The sole proprietor’s responsibilities include:
• Procuring all capital
• Personal liability for all claims against the business
• Showing business profits as part of the owner’s individual taxable income
• Obtaining local business licenses
• Registering the name of the business with the appropriate state agency
Advantages of Incorporating
Anyone who operates a business, alone or with others, may incorporate. Under the right circumstances, the owner of any size business can benefit!
Reduces Personal Liability
Incorporating helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or law suits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and can move to seize the owners’ homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose, and usually no more.
Spotlight on Limited Liability Companies
The Limited Liability Company (LLC) is a recognized business entity in all 50 states. LLCs are gaining popularity with small business owners because they combine the benefits of a corporation with the tax advantages and management flexibility of a partnership.
The main similarities between LLCs and corporations are:
• Both are legal entities created by a state filing
• Both help protect personal assets from business liabilities
• Both have few ownership restrictions
Learn About Incorporating: Types of Companies
Businesses may choose from a variety of corporate entities, based on their needs. Below are useful descriptions.
Limited Liability Company
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC’s because they combine the limited liability protection of a corporation with the “pass through” taxation of a sole proprietorship or partnership.
LLC’s have additional advantages over corporations:
• LLC’s allow greater flexibility in management and business organization
How LLC's are Taxed
Like the owners of sole proprietorships and partnerships, LLC owners report business income and losses on their personal tax returns. An LLC is not a separate taxable entity like a corporation. It is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship. All of the profits and losses of the LLC “pass through” the business to the LLC owners (called members), who report this information on their personal tax returns.
The IRS treats an LLC like a sole proprietorship or a partnership, depending on the number of members in the LLC.