One of the simplest structures for businesses is the sole proprietorship. It is owned by a single person without creating a separate business entity, which means there is no separation between taxes and liabilities. Sole proprietorships allow business losses to be deferred forward and backward but they also have unlimited liability for the debts and actions of the business.
Similar to a sole proprietorship, there are two or more people sharing the liability and flow through taxation directly proportional to their interest in the partnership.
Limited Liability Partnership
Similar to a general partnership except each partner is limited in liability for wrongful acts by other partners. Each partner is personally liable for his or her own wrongful or negligent acts.
One general partner has unlimited liability while limited partners participate in a manner similar to stockholders. The limited partners' liability extends only to as much as they have invested in the company and they generally are unable to bind the company to any agreements or contracts.
Corporations are entities, separate from the owners, officers and directors of the company. Articles of incorporation are filed to create the business.
The C in C corporation refers to the sub chapter C of the Internal Revenue Code. Profits from the C corporation are subject to double taxation because all earnings are taxed by the corporations and any money paid out to shareholders as dividends is taxed as well.
If the shareholders provide written consent, the corporation can avoid double taxation by becoming an S corporation. Corporate income is taxed as shareholder income in relation to shareholdings. Not all businesses can become S corporations. Limited Liability Companies are becoming a popular alternative to S corporations.
Limited Liability Corporations (LLCs)
Compared to S corporations, LLC's are similar but without many of the restrictions. Taxes are handled in a similar manner with flow through taxation to members based on ownership percentage. The business obligations of an LLC are immune from personal liabilities of its owners and members.
LLC's are owned by members and managed by managers. Its members can include other LLCs, corporations, partnerships, trusts and foreign individuals.
This format of business is very popular among smaller and medium size businesses.