Business Forms of Organization: Frequently Asked Questions
Choosing how to organize your business affects your taxes, your liability and your paperwork. Here are answers to common questions.
What are the main forms of business organization?
The most common are the sole proprietorship, general partnership, limited partnership, limited liability company (LLC), S corporation and C corporation. Each differs in how it is formed, who is responsible for its debts and how its income is taxed.
What is a sole proprietorship?
It is the simplest form: one individual operating a business, with no separate legal entity. You report income and expenses on your personal return, and you pay self-employment tax on net profit. The drawback is unlimited personal liability for business debts and claims.
How does a partnership work?
Two or more people share ownership. The partnership files an information return, and profits and losses pass through to the partners, who pay tax on their shares. In a general partnership, each partner can be liable for the partnership's debts. A written partnership agreement is essential.
What is the difference between an S corporation and a C corporation?
A C corporation is taxed as a separate entity on its profits, and shareholders are taxed again on dividends. An S corporation generally passes income through to shareholders to be taxed on their personal returns. S corporations have restrictions on the number and type of shareholders and on classes of stock.
Where do LLCs fit in?
An LLC is a state-law entity that offers liability protection and can be taxed as a sole proprietorship, partnership, or, by election, a corporation. That flexibility is a big reason for its popularity.
Can I change my structure later?
Yes, but changes can have tax and legal consequences, and some are more difficult than others. It is easier to choose well at the start. We can help you plan a change if your business outgrows its original form.
How do I choose?
Consider the liability risks of your business, expected profits, the number of owners, whether you want outside investors, the tax treatment you prefer, and the administrative work you can handle. See our formation services for help forming the entity you select.
For guidance on which structure suits you, contact us and we will look at your situation.
This article is general information, not tax, legal or investment advice for your specific situation.