If you are considering starting a small business, you may be trying to sort out the different types of businesses and wondering which type is best for you. Each type is best for a specific purpose or situation, relating to taxes, liability, and your ability to control the profits and losses of the business. Sorting out the acronyms can be tricky, but this run-down will help.
A sole proprietorship is a business operated by one individual; the business is considered part of the individual, not a separate entity. The business profits and losses are included on the individual's personal tax return, and the individual retains personal liability for the business debts and lawsuits.
A corporation is an entity which is separate from its owners. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation.
A subchapter-s corporation (or s-corp) is a corporation which has the benefits of limited liability of a corporation but which is taxed as a partnership, with the income or losses flowing through to the individual shareholders.
A limited liability company (LLC) is not a corporation, but it has the liability protection of a corporation and other benefits, like ease of formation. You can have a single-member LLC which pays taxes like a sole proprietorship, or a multiple-member LLC which pays taxes like a partnership. You can even have an LLC that's taxed like a corporation. There are few drawbacks to forming an LLC.
You may also want to look into the Series LLC
, a new type of LLC which is available in a few states. In a Series LLC, you can have a parent LLC and many sub-LLC's, each with separate liability.
A professional corporation is a specific type of corporation for professionals, such as attorneys, doctors, architects, and accountants. In some states, these professionals can form a corporation, but with the distinction that each professional is still liable for his or her own wrongful professional actions.
A partnership is a business entity with individuals who share the risk and benefits of business. A partnership may include general partners, who bear the liability for partnership debts and for actions of the partnership. It may also include limited partners who are merely investors and who do not share in the day-to-day operations of the business and who do not share in liability.
A general partnership is a partnership which includes only general partners. Under this structure, all partners participate in the day-to-day operations of the partnership and all partners bear personal responsibility for debts and liabilities of the partnership.
If a partnership has both general partners and limited partners, it is sometimes termed a "limited partnership." A limited partnership is an entity distinct from its partners. As with a "partnership," the general partners deal with the day-to-day operations of the partnership and they have liability for debts and for actions of the partners. Limited partners do not participate in day-to-day operations of the partnership and they bear no liability for debts or actions of the partnership.
Limited Liability Partnerships (LLPs) are formed with general partners, but all general partners are shielded from liability for the acts of other partners or employees. The LLP is similar to a limited liability company (LLC), but the LLP operates under partnership rules.
A limited liability company (LLC) operates like a partnership, but it has members instead of partners, and an operating agreement instead of a partnership agreement. The advantage to an LLC is that the liability of members is limited to their investment. Most states allow a single-member LLC to form. A single-member LLC is taxed as a sole proprietorship, while a multiple-member LLC is taxed as a partnership.