Understanding the Different Types of Business Entities – Foster Financial

Before starting a new business, it is important to understand exactly what type of business entity you are going to establish. Each type of business entity has specific methods of reporting business activity to the IRS, so it’s important that you know which methods apply to you. So here is a quick breakdown of Sole Proprietorships, C Corporations and S Corporations, Partnerships, and LLCs.

Sole Proprietors

A sole proprietor is simply someone who owns an unincorporated business by himself or herself. Sole proprietorships are arguably the easiest business to get up and running unless you plan on having employees, you aren’t going to need anything at all to get started.

As far as taxes go, all you’re going to need to fill out, as explained by 1040, is a Form 1040 and along with Schedule C – Profit and Loss from Business.

Corporations

Corporations include both C corporations and S corporations. Before deciding which one of these to go with for your business, you should consult a tax professional; however, here is a basic overview of what they are.

According to 1040, both C and S corporations are basically separate legal entities that are owned by shareholders and has limited liability. The difference is mostly related to taxes. C corporations pay income taxes while its shareholders pay taxes on their dividends. Meanwhile, S corporations only pay taxes on their net profits when received by the stockholder. Additionally, “S corporations can’t have more than 100 shareholders, and the shareholders cannot be other corporations, partnerships or non-resident aliens. The company also must be based in the U.S.”, explains 1040.

Partnerships

Partnerships are the result of two or more people form a business, and shares in that business’ profits and losses. The individuals in a partnership file a Form 1040, similar to a sole proprietorship, while the partnership as a whole file a Form 1065.

Limited Liability Companies

Limited Liability Companies, also known as LLCs, share certain aspects of corporations and partnerships. The structure of an LLC depends on the state that it resides in.

1040 explains that LLCs can be treated as either a partnership, corporation or a disregarded entity. This is determined by the IRS depending on how many members are included as part of the LLC. Two or more members will result in it being treated as either a partnership or corporation, while one member will be handled as a disregarded entity.

If you have any further questions regarding the tax implications of different types of entities, feel free to contact us.