Business Organization Types

You may have heard people talk about Sub-S corporations, LLCs and PCs and
their relative merits. You will need to decide which form of business is right for you.
Here is a brief description of each form:

Sole Proprietorship
A sole proprietorship is a business run by an individual. The owner is the
business; the owner has all of the profits and losses of the business. The owner
also has all the control and all the liability from the business operations. Business
taxes are paid by the owner through his or her personal income tax return.

A sole proprietorship (or proprietorship) is a form of business in which an

individual starts a business under his or her own name. In a sole proprietorship, you
are the business; that is, the business is not a separate entity from you.
If it sounds simple, it's because it is. The sole proprietorship is the oldest and
simplest form of business ownership. To start a sole proprietorship, all you need to
do is:

Create a business name and decide on a location for your business

File for a business license with your locality, and get permission from your
locality if you want to operate your business from home
Set up a business checking account.

You don't need to prepare any legal documents because you are not in business
with someone else, and you don't have to set up an elaborate business structure: no
board of directors, no meetings, no minutes, no complicated accounting for shares
in the business.
STEPS to Start a Sole Proprietorship
1. Select, Register, and Trademark Your Business Name
Most business owners start out with a business name, but before you solidify that
name by putting it in a logo, on business cards, and on your website, make sure it
will be a good name for many years. Selecting a name, registering that name, and
possibly trademarking the name mean that you have made a commitment to that
name. Read this section before you select that business name.
2. Find a Business Location
Unless you are working out of your home, you will need a location for your
business. It might be an office or a retail space or a warehouse. Here are the steps
to take to find that location, negotiate the lease, and get favorable terms.

3. Select Your Business Legal Type

Here is a checklist to help you make the decision of what type of business legal
entity you will start. The types of entities range from the simplest sole
proprietorship, through partnerships and limited liability companies, to the
complicated corporation and s-corporation forms.
4. Apply for Your Tax ID Number (Employer ID)
One of the first steps in business start-up, after you have a name and a business
address and you know your legal form, is to fill out a tax identification application
(sometimes called an employer ID. This number acts as your unique business
identifier on all types of registrations and documents, and most banks want you to
have this number before you can set up a business checking account and apply for
a loan.
5. Apply to Your State for a Sales Tax Permit (for Taxable Items, Services)
If you are selling any products or services that are subject to sales tax in your state,
you must collect tax from customers and pay the state back that tax. Here's what
you need to know about state sales tax.
6. Get a Business Checking Account
After you have applied for your tax ID number, you can use that number to set up a
business checking account. Here are some factors to consider when setting up that
account.
7. Obtain Local Licenses and Permits
Learn about what local licenses and permits you might need to apply for during the
start-up of your business.
8. Create a Marketing Plan for Your Business
Before you can start selling your products or services, you will need to put together
a plan detailing exactly what you are selling, who you are selling to, defining your
competition, and defining exactly how you will advertise and promote your
products/services during your first year of business and beyond. Having a
marketing plan in place will help a potential lender see that you are serious about
selling and it will give you a plan of attack to work from as you get started.

Partnership
A partnership is a business which operates like a sole proprietorship, but with
several individuals running it. The partners share the profits/losses, have control
and liability for business operations. Partnership taxes are paid by the partners
on their personal tax returns, in proportion to their share of ownership.

Partnerships are an old, respected type of business in the U.S. Today, there are
various forms of partnerships designed to help partners limit their liability. [/p]
[p]You and a friend have decided to go into business together. Or maybe you and
your spouse or a family member are eager to work together in a business. If there
are several people running a business, you might want to form a partnership. How
do you get started?

1. What is a Partnership
Definition of a partnership.
2. Setting up a Partnership with a Partnership Agreement
To set up a partnership the right way, you will need a partnership agreement. Here
is a list of the terms and conditions you will need to include in this agreement.
3. Types of Partnerships
You may have heard the terms - general partnership, limited partnership, limited
liability partnership - and been confused. This article might help you sort out the
different partnership types.
4. All the Taxes a Partnership Pays
Partnerships pay all the same taxes as other businesses. In addition, partnerships
pay income tax in a special way. Here is a list of all the taxes a partnership pays.
5. How a Partnership Pays Income Taxes
A partnership does not pay income tax directly; individual partners pay income tax
based on their share of the profits from the partnership each year. Learn about the
income tax forms you need to file for a partnership.
6. Husband/Wife Partnerships - Qualified Joint Ventures
A husband and wife partnership may be considered as a special tax case called a
qualified joint venture. If you qualify, you and your spouse can file Schedule C
forms instead of a partnership tax return, saving money on tax preparation.

Corporation (or C-Corporation)

A corporation is a business which is set up as a separate legal entity from its
owners. The Board of Directors makes operational decisions. Owners are
protected (shielded) from liabilities of the corporation, and the corporation pays
corporate income taxes.

Limited Liability Company (LLC)

A limited liability company is formed by "members" whose liability is limited to
their investment. An LLC is often used in place of partnerships to limit liability,
while having the option of being taxed through the personal tax returns of the
members. Here is more information on LLCs vs. Corporations.

is a legal form of business organization with daily activities like a partnership but
with limited liability similar to a corporation. An LLC is formed in the state in which
it operates. An LLC is formed by filing Articles of Organization with the state in
which you will be doing business. (A few states use a Certificate of Organization to
form an LLC.)
An LLC is sometimes incorrectly referred to as a Limited Liability Corporation.
Although an LLC can be taxed as a corporation (see below), an LLC is not formed as
a corporation.

The owners of an LLC are called "members" rather than partners or shareholders.
The members draw up an operating agreement (similar to a partnership agreement)
by which they run the LLC. A single-member LLC is taxed as a sole proprietorship,
while a multiple-member LLC is taxed as a partnership.

Question: What is the Difference Between a Limited Liability Company and a

Corporation?
Answer:
There are two common types of businesses:

"Pass-through" Businesses
Pass-through businesses are those in which the profits and losses of the business
pass through to the owners or shareholders. In other words, the business income
is considered as the owner's or shareholder's income, and the
owner/shareholder pays the tax on his or her personal tax return.

Separate Business Entities

Corporations are separate businesses entities. The profits and losses of the
corporation are taxable to the corporation, not the owners (shareholders).

How are LLCs and Corporations Formed?

Limited Liability Company (LLC)Set-up

An LLC is formed by one or more business people, as owners. The owners, called
"Members," file Articles of Organization and set out an Operating Agreement. An
LLC is a pass-through type of business, because the profits and losses are passed
on to the Members depending on their share of membership.

Starting a Corporation
A Corporation is a separate legal entity. It is formed by filing corporate
organization forms in the state where the corporation is located, and by
designating shareholders, each with a specific number of shares. The
corporation also creates a Board of Directors to oversee the corporate business.

How are Corporations and Limited Liability Companies Alike?

Both corporations and LLCs limit the liability of the owners/shareholders from the
debts of the business and against lawsuits against the business.
How are Corporations and Limited Liability Companies Different?
Corporations and LLCs are different in how they are taxed. Because corporations

are separate entities, they are taxed at the corporate rate, while LLCs are taxed
based on Adjusted Gross Income of the owners. Here is an example:

A corporation has a profit of $350,000 for 2007. That profit is taxed at the
corporate tax rate of 35 percent.

An LLC has the same amount of profit of $350,000. Its two Members each
have a 50 percent share in the LLC, so each one is taxed on $175,000 of income
on his or her personal tax return. The income from the LLC is included in the
1040 on line 12, and is considered along with other income for that person or
couple for that year.