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Different Business Types & Their Benefits
*All definitions are based upon the definitions given by Investopedia. All benefits were found from various sites.
Sole Proprietorship: An unincorporated business that has only one owner who pays personal income tax on the profits earned from the business. Additionally, they are responsible for all business debts, losses and liabilities. It is the easiest type of business to establish due to the lack of government regulation. Benefits:
- The easiest business to form because no filing of papers or registration is required.
- The owner has complete control of the business and makes all of the decisions.
- The tax preparation process is simple.
- Tax rates are lower compared to other business structures.
Partnership: A formal arrangement by two or more parties to manage and operate a business and share its profits. There are various different types of partnerships.
- Easy to form
- Maintain a favorable taxation to most small businesses
General Partnership: A business arrangement in which two or more individuals agree to share all assets, profits, and financial and legal liabilities. Partners agree to unlimited liabilities, which means the amount of liability is not capped and can be paid through the seizure of an owner’s assets. Partners are liable for all debts and obligations in full regardless of the amount of the individual partner’s capital contribution.
- Easy to create and maintain
- No start up fees
- Owners are able to report their share of business losses on personal income taxes
Limited Partnership: A partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
- Easy to attract investors because they are only responsible for their total amount of investment
- Limited liability for the limited partners
- General partners can raise money without affecting their control of the business
- Limited partners can leave without dissolving the partnership
Limited Liability Company (LLC): An LLC is a corporate structure in which the owners are not personally liable for the company’s debts or liabilities. LLCs combine the characteristics of a corporation with those of a partnership or sole proprietorship. LLCs do not pay taxes, their profits and losses are passed through to the members, who claim them on their tax returns.
- Owners are protected from personal liability for any debts or obligations
- Owners can choose how the business pays taxes
- Not required to have annual meetings
- Not required to have a board of directors
- Can have unlimited shareholders
- Maintain pass-through taxation, which helps in the case of small businesses
S - Corp: A small business corporation that is treated for federal tax purposes as a partnership. This type of corporation must have less than 100 shareholders.
- Avoids double taxation by passing the income through to the owners
- Protects the personal assets of the shareholders
- In general, able to get more loans
- Owners share net profits and report their share on personal income taxes
C - Corp: A legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corps are also subject to corporate income tax. This type of corporation is subject to a double taxation, the taxing of profits are both administered at the corporate and personal level. Benefits:
- Owners do not have personal liability
- Gain more access to financial resources
- Exists separately from the lives of its stockholders Nonprofit: Nonprofits are organizations which are built to address a social purpose. Nonprofits are excused from federal tax liability. However, these organizations must distribute surplus earnings to a social cause.
- Does not pay income taxes on money it receives for charitable purposes
- Donors are able to use their donation as a tax deduction