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What is the difference between business types?

Choosing a structure for your business can be challenging. The entity you choose will dictate things like tax treatment and bookkeeping for years to come. Below is a brief description of various entity options; however, it is always best to contact an attorney for advice.

Sole proprietorship (SP)

To create an SP, the business owner doesn't have to take any action, making this is an extremely common type of business entity choice. You can either use your own name as your business name or file certain forms, which usually can be obtained from the local county clerk's office, to create a different business name. Taxes are paid as if you were an employee of a company, plus employer taxes.

Limited liability corporation (LLC)

An LLC is designed to shield owners of a company from lawsuits. LLCs make your personal assets separate from your business assets so in the event of a lawsuit, a plaintiff can only seek money from the business. The LLC requires registration with the U.S. Government and the state. It may also require specific licenses depending on what the business does.

LLCs are odd in that the IRS does not recognize them as a business entity. Unless the company elects to be treated differently, the IRS treats LLCs as partnerships for tax purposes. Each LLC owner pays tax on their share of profits.

Limited liability partnership (LLP)

An LLP is similar to an LLC. The LLP shields the partners from legal action pertaining to misconduct of any of the other partners. An LLP passes taxation through to the partners. Each partner is required to pay tax on their earnings, or income, plus a self-employment tax.

S Corporation

S Corps are by law defined as a separate entity from the owners registered with both state and federal governments. The company does not pay income taxes; instead, it passes income, losses, deductions and credits through to shareholders.

C Corporation

A C Corp is a legal entity owned by shareholders. This means the corporation, not the shareholders, are liable for the actions and debts or legal issues the business incurs.

C corporations have more complex tax treatment. The C Corp pays corporate taxes, and then individual shareholders pay taxes on dividends they've received from the corporation. This entity is usually chosen by large corporations and business chains with many employees.

These are just some of the considerations to evaluate before selecting a business entity. For help determining which entity is best for your business, consider contacting a commercial law attorney.

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