Welcome to the topic “Business Entity Comparison.”
Let’s face it, now more than ever we are thinking about becoming an entrepreneur in some from. You may have heard the term business entity many times before throughout your journey, but do you know the definition of a business entity?
What is a Business Entity?
Business entities are organizations formed by one or more persons. Since they are formed at the state level, they must comply with state laws. In most states, a business owner is required to file documents with a particular state agency, like the office of the Secretary of State, in order to legally set up their business.
Main Types of business entities include:
- Sole Proprietorships, single member LLC
- Partnerships
- S corporation
- C corporation
Business Entities Differences
Here we will breakdown and compare the difference between the different types of business entities to give you a better understanding and to help you select the proper entity for your business adventure.
Sole proprietor–Entity and liability
A sole proprietor also referred to as a sole trader or a proprietorship is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.
• Schedule C (Form 1040),
Profit or Loss From Business
• Schedule F (Form 1040),
Profit or Loss From Farming
• Schedule SE (Form 1040),
Self-Employment Tax
• IRS Pub . 334, Tax Guide for Small Business
Owner is personally liable for all debts and lawsuits against the business. Exception: If organized as an LLC, liability is usually limited to owner’s investment and his or her own malpractice or debt guarantees.
Partnership- Entity and Liability
A business partnership is a legal agreement that is most often formed by between two or more individuals or companies.
• Form 1065, U.S. Return of Partnership Income
• IRS Pub . 541, Partnerships
• IRC Subchapter K, 701 through 761
A general partner is personally liable for all debts and lawsuits brought against the partnership. Exception:
If the partner is a limited partner, or the business is organized as an LLC, liability is generally limited to the partner’s investment, plus his or her own malpractice or debt guarantees.
S corporation- Entity and Liability
By means of definition, an S corporation (or S-corp) is a corporation that is treated as a pass-through entity through an election made with the IRS to be considered as and S corporation for federal tax purposes.
• Form 1120-S, U.S. Income Tax Return for an S Corporation
• IRC Subchapter S, 1361 through 1379
A shareholder’s liability is limited to the amount invested, plus his or her own malpractice or debt guarantees.
C corporation- Entity and Liability
A C corporation (or C-corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.
• Form 1120, U.S. Corporation Income Tax Return
• IRS Pub . 542, Corporations
• IRC Subchapter C, §301 through §385
A shareholder’s liability is limited to the amount invested, plus his or her own malpractice or debt guarantees.
Conclusion
Hopefully, you can now analyze and choose the best entity for your new business adventure.
Please read: Delving Into Tax Returns
