There are several different business form options that those starting up a new business can choose from. For that reason, entrepreneurs starting up a business should be familiar with the different business forms so they can make the best possible decision for their business.
Common business formats
Businesses come in all shapes and sizes, but there are a limited number of legal formats for businesses. The most common categories include:
- Sole proprietorship: A sole proprietorship is the most basic business form. Sole proprietorships have only one owner. The sole proprietor that owns the sole proprietorship does not have any personal protection from creditor claims or lawsuits. The sole proprietor’s personal assets can be used to satisfy a business debt or legal judgment against the business. The sole proprietor’s business income and expenses are reported on their personal income tax return.
- Partnership: Though there are not documents to file with the state, a partnership, which consists of two or more owners of a business, typically have a partnership agreement that defines how the partnership operates and how profits and losses are shared. Each of the partners has unlimited liability for business debts, lawsuits against the business and actions of other partners. The profits and losses of the business are reported on the personal tax returns of the partners.
- Corporation: A corporation is formed when articles of corporation are formed with the state. A corporation is the most formal and expensive business form and must meet many requirements. A corporation provides limited liability protection for its owners. Corporations are oftentimes referred to as doubled taxed because the corporation is taxed on its earnings and the shareholders are taxed on corporate dividends.
- Limited liability company: A limited liability company (LLC) is filed with the state when it is formed and its owners, referred to as members, enjoy limited liability protection. The profits and losses of the LLC flow through the company to each of the members who must decide if they want to be taxed as a partnership or a corporation.
Business law can help give new business owners options to help them set up their business. Because choosing a business form is an important step, entrepreneurs should know what to take into account to make the best decision possible.