What type of corporation should i be

Partnerships pay their business taxes by filing an information return with the IRS to report business tax liability. No tax is paid on this form because of the partners' pass-through status. Instead, the income or loss is divided between the partners according to their agreement. Then, each partner receives a Schedule K-1 form showing their share for the year, which is reported on their personal tax returns.

There are several types of partnerships to choose from depending on the amount of liability the partners want to assume and the type of group working in the business:. A general partnership includes general partners who each make business decisions, but each partner has unlimited liability for debts and decisions of other partners. A limited partnership sometimes called an "LP" has both general partners who participate in business decisions and limited partners who invest in the business but don't participate in daily operations.

General partners have liability for company debts and actions, but limited partners are shielded from liability as long as they don't become involved with business decision making. Limited liability partnerships LLPs are formed with general partners but all the general partners are shielded from liability for the acts of the others as well as employees. Businesses with multiple owners or groups of professionals, like a law firm or CPA firm, often use one of the partnership types depending on their specific situation.

Limited liability partnerships are not allowed in some states, and they may be limited to certain types of professions, such as doctors, attorneys, and accounting firms. Check with your state if you are considering this type.

You may not need an attorney to start a sole proprietorship because you don't have to register the business or create a contract with other owners. For other business types, get help from both an attorney and a tax professional. The attorney can help you prepare and file important documents and consider your liability, and the tax professional can help you analyze your tax situation.

Sole proprietorships are the most common type of business in the U. A survey by the Tax Foundation found that there were 23 million sole proprietorships operating in , compared to 1. Here's a general ranking of liability for their owners of the major business types discussed in this article:.

Small Business Administration. Cornell Legal Information Institute. Personal Service Corporation. Richmond School of Law. Accessed June 25, Tax Foundation. American Bar Association. Actively scan device characteristics for identification. Use precise geolocation data.

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Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. Headquartered in St. Well-known examples include:. The law regards a corporation as an entity separate from its owners. It has its own legal rights, independent of its owners — it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks.

Corporation filing fees vary by state and fee category. There are several types of corporations, including C corporations , S corporations , B corporations , closed corporations and nonprofit corporations.

This type of business is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you've started a shoe company and have already named your business, appointed directors, and raised capital through shareholders, the next step is to become incorporated. You're essentially conducting business at a riskier, yet more lucrative rate.

Additionally, your business could file as an S corporation for the tax benefits associated with it. There are many popular examples of corporations, including:. A cooperative co-op is owned by the same people it serves. Its offerings benefit the company's members, also called user-owners, who vote on the organization's mission and direction and share profits.

Advantages that cooperatives offer include:. Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation, such as incorporated Inc. The filing fee associated with a co-op agreement varies by state. An example of a co-op is CHS Inc. Unlike the other types of businesses, co-ops are owned by the people they serve. Notable examples of co-ops include:. Key takeaway: The five types of business structures are sole proprietorship, partnership, limited liability company, corporation and cooperative.

Choosing the right structure depends largely on your business type. As your business grows, you'll be able to switch structures to meet its needs. For new businesses that could fall into two or more of these categories, it's not always easy to decide which structure to choose. You need to consider your startup's financial needs, risk and ability to grow. It can be difficult to switch your legal structure after you've registered your business, so give it careful analysis in the early stages of forming your business.

Here are some important factors to consider as you choose the legal structure for your business. You should also plan to consult with your CPA for his or her advice. Where is your company headed, and which type of legal structure allows for the growth you envision?

Turn to your business plan to review your goals, and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. When it comes to startup and operational complexity, nothing is more simple than a sole proprietorship.

You simply register your name, start doing business, report the profits, and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits.

Corporations and LLCs have various reporting requirements with state governments and the federal government. A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means that creditors and customers can sue the corporation, but they cannot gain access to any personal assets of the officers or shareholders.

An LLC offers the same protection, but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement. An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year. Individuals in a partnership also claim their share of the profits as personal income.

Your accountant may suggest quarterly or biannual advance payments to minimize the end effect on your return. A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll.

If you pay yourself from the corporation, you will pay personal taxes, such as for Social Security and Medicare, on your personal return. If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice for you.

You can negotiate such control in a partnership agreement as well. A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so, too, does the need to operate it as a board-directed entity.

Even for a small corporation, the rules intended for larger organizations — such as keeping notes of every major decision that affects the company — still apply. Tip: Important factors to consider before liability, tax structure and industry regulations. By making a list of specific attributes about your business and its founders, you can choose the right business structure for you. If you need to obtain outside funding, such as from an investor, venture capitalist, or bank, you may be better off establishing a corporation.

Corporations have an easier time obtaining outside funding than sole proprietorships. Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners.

An LLC can face similar struggles, although, as its own entity, it is not always necessary for the owner to use their personal credit or assets. In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

As you choose your structure, understand the state and industry you're in. It's not a 'one size fits all,' and businesses may not be aware of what's applicable to them.

The structures discussed here only apply to for-profit businesses. If you've done your research and you're still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law. The board of directors acts as the decision-makers for the company, while the shareholders are more like the financial backing.

C corporations can be hit with double taxation, however, which happens when the profits of the company are taxed at the corporate level and then again on individuals' income tax returns. This is often avoided by spreading profits out to employees as benefits, which allows the corporation to be taxed at a lower rate on a personal tax return.

But, this complicated corporate structure often necessitates an account or financial advisor, which is an added cost. If your plan is to grow your business and eventually sell it, a C corporation can be a great way to keep your personal assets as a separate legal entity from your professional corporation.

The ability to have a number of shareholders, even those from other corporations, gives C corps great growth potential, too. Just remember: you will likely incur financial costs in the form of paying advisors, especially come tax time.

A non-profit corporation is similar to a traditional corporation in structure: There's generally a board of directors, as well as donors or financial backers. But, a non-profit generates no profits, as the name implies.

A non-profit must also be created in support of a specific cause, generally one that's public, specifically for members of the non-profit, or groups of people. Non-profit corporations are tax exempt, paying no corporate taxes or federal tax. They're also permitted to receive funding from a wide variety of sources: grants, public donors, private donors, and corporations.

Further separating non-profits from for-profit corporations, donations to non-profits are typically tax-deductible for donors as well. If you're passionate about helping others and your focus is to maximize the good you do, not the profits you make, a non-profit is the best way to see your mission through. A limited liability company LLC , also known as a limited liability corporation, is a business entity that prioritizes the separation of the people in the business and their personal liability.

Similar to other corporation types on this list, an LLC protects members from being financially responsible for damages. More specifically, an LLC protects the personal assets of the owners in the event of a lawsuit or any kind of financial damages. Forming an LLC requires articles of incorporation, in which the structure of the business is laid out. Unlike a C corp, no board of directors is required for an LLC.

In fact, an LLC can choose almost any structure desired, meaning it can imitate an equal partnership, have a board of directors, or fall somewhere in between. LLCs offer additional perks, including simpler financial structures than corporations, taxation at a personal level not a corporate level , and the ability to own multiple pieces of real estate under different LLCs to limit taxation.

If you plan on keeping your business close to the vest and don't intend on going public, an LLC can be a great way to improve your professional appearance and gain certain legal and tax benefits. A sole proprietorship is a one-person show. In a sole proprietorship, the business and the person are the same, with no legal separations between the two.

This means the person is personally and financially responsible for any debts or damages. While solo in name, sole proprietors are able to hire employees or contractors. But, the work done by any employees hired through a sole proprietorship is still legally bound to the sole proprietor.

Again, this keeps the responsibility all on the founder of the sole proprietorship. Unlike a freelancer, a sole proprietor has a registered business name , can hire employees, purchase business insurance, and even obtain higher forms of business licenses. Sole proprietorships are easy to start, making them a great way to give your solo operation a more professional appearance. If you're currently freelancing or plan on starting a small operation that requires only your efforts, a sole proprietorship could be the right choice.