When starting a business, you must decide what type of business entity to establish. Your form of business determines which income tax form you must file. The most common forms of business are the sole proprietorship, the partnership, the corporation, and the S corporation. Sole owners include professionals, service providers, and retailers who do business on their own.
While a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. A company's financial activities (for example, an LLC) are a hybrid between a partnership and a corporation. The members of an LLC have operating flexibility and income benefits similar to those of a partnership, but they are also exposed to limited liability. While this seems very similar to a limited partnership, there are important legal and statutory differences.
It is recommended to consult with an attorney to determine the best entity. A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its statutes. The articles of association must be filed with the state to establish a corporation. Shareholders are protected from liability and those shareholders who are also employees can take advantage of some tax-exempt benefits, such as health insurance.
In type C joint-stock companies, there is double taxation: firstly, through taxes on profits and, secondly, through taxes on shareholder dividends (in the form of capital gains). Subchapter S companies are special closed companies (there are limits on the number of members) created to offer small businesses a tax advantage, if the requirements of the IRS Code are met. Landlords don't pay corporate taxes and declare them on their individual federal income tax returns, preventing regular corporations from double taxing. Partnership is when there are several owners of a business.
Partners can have an equal share of the profits or losses or as they decide between them. The law also allows the exclusive participation of members with benefits. Partners also have unlimited joint liability. However, their withdrawals from the company are monitored.
They can only withdraw money to the extent decided in the partnership agreement. If they require more than the above amount, they may need to obtain explicit consent from other partners. A joint venture is when two organizations come together for a specific purpose. It's like a partnership, except for the fact that it's meant to achieve a common purpose, after which the parties to the joint venture act in their own way.