Choosing a Business Structure
Your type of business determines which income tax form(s) you have to file. Common business structures are sole proprietorship, partnership, corporation, S corporation, and limited liability company. Legal and tax considerations enter into selecting a business structure.
Sole proprietor – an individual who owns an unincorporated business by himself/herself.
Partnership – a relationship where two or more persons join together to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Corporation – a relationship where prospective shareholders exchange money, property, or both, for the corporation’s capital stock. Profits are taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends.
S corporation – a corporation, meeting certain criteria, that elects to be treated as an S corporation. Generally an S corporation is exempt from income tax; the shareholders report the S corporation’s income, deductions, loss and credits on their individual tax returns.
Limited Liability Corporation – an entity— statutorily authorized in certain states—that is characterized by limited liability for debts similar to that of a corporation, management by members or managers, and pass-through taxation similar to that of a partnership.
