What Type Of Business Organization Is Best For You
you are going it alone or with another person, it is best
to consult a lawyer to determine which form of business
organization will be best for you. Your choices and the
attributes of each form are essentially as follows:
Proprietorship: A sole proprietorship is one person alone.
He will have unlimited liability for all debts of the
business, and the income or loss from the business will
be reported on his or her personal income tax return along
with all other income and expense he or she normally reports
(although it will be on a separate schedule). Although
proprietorship avoids the expense for forming a partnership
or corporation, many start businesses this way because
they are unfamiliar with the other forms of organizations.
Partnership: In a general partnership each of the two
or more partners will have unlimited liability for the
debts of the business. The income and expense is reported
on a separate return for tax purposes, but each partner
then reports his pro-rata share of the profit or loss
from the business as one line on his personal tax return.
Partnership: With a limited partnership, each of the general
partners has unlimited liability for the debts of the
partnership, but the limited partner's exposure to the
debts of the partnership is limited to the contribution
each has made to the partnership. With certain minor exceptions,
the reporting for tax purposes is the same as for a general
A corporation provides limited liability for the investors.
Except as indicated below, none of the shareholders in
a corporation is obligated for the debts of the corporation;
creditors can look only to the corporation's assets for
payment. The corporation files its own tax return and
pays taxes on its income. If the corporation distributes
some of its earnings in the form of dividends, it does
not deduct the dividend in computing its taxes, but the
shareholder recipients must pay taxes on those dividends
even though the corporation has paid taxes on its earnings.
A corporation has some tax benefits such as deductibility
of health insurance premiums.
Corporation: A corporation that has made an election to
be an "S" Corporation for federal income tax
purposes is treated as a partnership for tax purposes
although it is treated as a regular corporation for other
Liability: A limited liability company provides limited
liability for all of its members, but typically can be
treated as a partnership for federal income tax purposes.
State laws may differ as to whether it is treated as a
partnership or a corporation for state income tax purposes.
It can be managed by all of the members or can have centralized
management in one or more of the members.
Obviously there are variations in these rules and you
should consult with your attorney and/or accountant in
each specific case to determine what form of organization
best fits your needs.
of the things to consider in making the final decision
is that although a corporation has limited liability for
its shareholders, if the corporation does not have sufficient
assets various creditors may insist on personal guarantees
from the shareholders. Examples are your landlord, some
suppliers, and, by law, liability for certain payroll
taxes and liabilities to employees.