Forms of Business Entity
People in business should carefully sample the various categories of business organizations available before deciding on the one that best fits their needs. This action guarantees that the chosen agency is managed successfully, with minimum taxes and liability exposure. Furthermore, formalizing it would help to define the positions that different stakeholders will fill. When deciding on an entity, a businessperson can weigh the following fundamental factors: the risk faced on the founder's properties, the interests of prospective buyers, prices, the favorability of applicable tax policies, and the availability of stock benefits for his/her workers.
Sole Proprietorship
They include sole proprietorship, partnership, a corporation, and Limited Liability Company (LLC). Sole proprietorship involves an individual running a business entity as the owner, and his/her assets are liable to losses in case of risks.
Partnership
A partnership, on the other hand, encompasses a group of individuals running an organization as partners and each partner owns a percentage of the entity. The organization does not pay income taxes on its activities. Instead, each partner pays income tax based on their earnings off the partnership.
Corporation
A corporation is an organization managed by a board of directors and owned by stakeholders. An LLC is taxed similarly as that of partnerships unless its owners opt for a corporation form of taxation. In short, a Limited Liability Company combines both the liability protection of a corporation and the favorable federal tax treatment. Other specialized types of business entities include benefit corporations (earns profits while addressing social and environmental issues), and low-profit limited liability company (accommodates social ventures with financial goals).
Corporations
Advantages of a corporation include free transferability of ownership, unlimited life, limited liability of shareholder's assets, and comprehensive and well-understood governance laws. Even though the shareholders' assets are protected in the case of losses, a court, under the alter ego doctrine, may order shareholders to be personally liable for a corporation's obligations. A corporation can be taxed on its net income as per the specifications of Subchapter C of the Internal Revenue Code; thereby becoming a C corporation. An S corporation, on the other hand, allows certain individuals to operate as a corporation but they are taxed based on the individual income harnessed from the business entity. In fact, an S corporation form of a business entity does not pay federal income tax, and its profits are taxed once.
Partnerships
Partnerships can be a general, limited or limited liability. In general partnerships, there exists unlimited responsibility for any debt incurred by the business. Additionally, general partners should be thoroughly vetted before they are recruited because they act as agents of the company. In a limited partnership setting, a general partner's liability depends on the amount of his/her capital commitment. A limited liability partnership allows partners to have unlimited personal responsibility for their misdeeds. However, a partner in this setup is only liable for fellow partners' actions to the extent of the assets owned by the partnership. For tax treatment, partnerships don't pay income tax at the organization level. Any income or loss is reported on the individual tax return. Additionally, operating capital for a partnership is strictly funded by partners as well as loans from outsiders. Partnerships rarely raise capital in a public setting. If a partnership's capital is raised on a public forum, the entity will be taxed as a corporation.
