1) Sole proprietorship
2) Partnership, and
3) Corporation
EASE AND EXPENSE OF
OPERATION
Each of those listed above have attributes that render it more adaptable to one particular set of circumstances. There can be an overlapping of attributes, especially with regard to closely held corporations (corporation with few stockholders, no ready market for the stock, and substantial majority stockholder participation in management, direction and operations of company).
A sole proprietor doing business under his/her own name may operate without any expense or formal organization. A sole proprietor has unlimited personal liability. Your business and personal assets are subject to claims of all creditors without limitation (except to the extent those assets are held jointly with another person).
If more than one person is involved, a general partnership may be organized, also with little expense or formality. Written Articles of Agreement are advisable, and no filing with the state is required unless the business is conducting business under an assumed or fictitious name. General partners in a partnership have unlimited liability (unless you change to a limited liability corporation, a form of closely held corporation).
A business corporation requires formal Articles of Incorporation, compliance with statutory procedures and the payment of filing fees and organization expenses. The limited liability of the shareholders of a corporation is the greatest source of popular appeal as a form of doing business. As a business with a corporate name the corporation also has the right to sue and be sued in that name. A corporate may also exist in perpetuity (beyond the life or career of a partner or sole proprietor). It is also easier to transfer the assets and/or stock in a corporation. Stock can be divided in to any number and types of desired shares (unless restricted by bylaws and/or buy-sell agreements usually found in closely held corporations).
TAX
CONSEQUENCES
Sole proprietorship: Taxed at the individual rate. The sole proprietor must maintain clear business records to determine the income and expense related to a business activity. The business income is reported on a separate Schedule C attached to your 1040. You can deduct from this business income the necessary and ordinary business expenses paid or incurred during the year. If you lose money in the early years you can offset income from other sources (if any) and reduce total tax liability.
Partnership v Corporation: The classification of an organization as a corporation or partnership is made under the Internal Revenue Code. Corporation pay taxes, partnerships do not, the tax liability is passed through to the partners to be paid at their individual rates. However, although a corporation pays taxes, the dividends that it pays is also taxable at the recipients’ individual rate. This double taxation make many organizers pursue Subchapter S status.
Subchapter S: If a corporation has fewer than 25 individual shareholders and if it meets other certain criteria, it may make an election under Subchapter S of the Internal Revenue Code whereby the corporation will pay no tax (with some exceptions) and all income will be taxed to the shareholders, whether or not distributed. For this reason, coupled with the continued limited liability this form is the most utilized for small business.
