Entrepreneurs need to make a range of decisions to get their business off the starting point. The kind of business entity they choose which will determine how their company is taxed and the amount of insurance they have to cover their liabilities could be one of the most important choices. The company you select will influence everything from the ease of obtaining a small business loans to the amount you pay in taxes.
The types of entities you can form depend on state laws and the Internal Revenue Service. The most commonly used are sole proprietorships, partnerships and corporations. Each has its own pros, cons, and benefits, including the degree and type of legal protection offered as well as tax treatment and formal requirements.
A sole proprietorship business is the most straightforward type of business. It is a business that can be formed without formalities and the sole proprietor is personally accountable for all debts and obligations. Some sole proprietors opt to declare their business names within their state as D/B/As, however, it does not provide formal protection from personal liability.
Partnerships are made up of two or more individuals who wish to conduct business in a group. They are taxed just like sole proprietorships, and the profits and losses are reported on the individual income tax returns of the owners.
Corporations are distinct entities that exist to keep assets and offer services for a profit. These companies must file federal and state tax returns which can be expensive for smaller businesses. These companies face what is known as double taxation, meaning they are taxed once on their income, and then when they distribute funds to shareholders.