4. Corporations (C-Corp and S-Corp) Corporations are the most complex business structure. A corporation is a legal entity that is separate and independent from the people who own or run the corporation, namely shareholders.
The two types of corporations are C-Corps and S-Corps. The major difference among the two types of corporations is the tax treatment of the two entities: Taxation (C-Corp): For federal income tax purposes, a C-Corp is recognized as a separate taxpaying entity, thus the entity files its own tax return (Form 1120).
One of the first decisions you’ll need to make when you start a business is to determine the correct legal structure for your company.
Ready? 1. Sole Proprietorship. A type of business entity that is owned and run by one individual – there is no legal distinction between the owner and the business. Sole Proprietorships are the most common form of legal structure for small businesses. Taxation: A sole Proprietorship has pass-through taxation.
Formation: The sole proprietorship is the simplest way of doing business. The costs to create a sole proprietorship are very low and very little formality is required. Pros of a Sole Proprietorship: • Easy and fairly cheap to establish. • Owner has absolute control over the business. Cons of a Sole Proprietorship:
A partnership agreement stipulates the terms of the partnership by formalizing rules for profit/loss sharing, ownership percentages, dissolution terms, and management rights among many other things. Taxation: A partnership is a tax-reporting entity, not a tax paying entity.
The LLC entity is only required to file an informational tax return, similar in character to the general partnership. Single member LLCs are allowed to report business expenses on Form 1040 Schedule C, E, or F. LLCs with more than one member usually file a partnership return Form 1065.