There are many different types of business entities, or business structures, that the United States government recognizes. However, most small businesses choose to operate as one of the following six: sole proprietorship, limited liability company (LLC), general partnership, limited partnership, C corporation, or S corporation. When determining which business entity to operate as, small business owners should consider all of the requirements of that business entity, including the tax implications.
Many small business owners choose to operate as a sole proprietorship. According to the IRS, “A sole proprietor is someone who owns an unincorporated business by himself or herself.” Since sole proprietorships do not have to be registered, if you are the only owner and operator, your business is a sole proprietorship unless you register differently. One of the disadvantages of a sole proprietorship is that the owner assumes all liability for the business. Owners of sole proprietorships file taxes on their personal tax returns.
Limited Liability Company (LLC)
Another type of business entity small business owners may choose to operate as is a limited liability company (LLC). LLCs can have a single owner or multiple owners. Although LLCs require registration with the State, one of the main advantages is that LLCs offer limited liability protections. In addition, when it comes to taxes, LLCs are versatile; small business owners can choose to have the IRS tax it as a corporation or as a pass-through entity where they file taxes on their personal tax returns.
Small business owners may also choose to operate as a general partnership. General partnerships are similar to sole proprietorships in that they do not have to be registered with the state. If your business has more than one owner, you are a general partnership unless you register differently. Like sole proprietorships, one of the main disadvantages of general partnerships has to do with liability. Each owner is equally liable for the business. Owners of general partnerships split the profits and losses and file taxes on their personal tax returns.
The fourth type of business entity small business owners may choose to operate as is a limited partnership. Unlike general partnerships, limited partnerships must be registered with the state. There are two types of partners - general partners who own and operate the business and limited partners who do not own or operate the business and instead are investors. The main advantage of limited partnerships is that although general partners assume all liability for the business, limited partners generally do not assume any liability. General owners of limited partnerships file taxes on their personal tax returns.
One of the less popular choices for small business owners is C corporations. C corporations must be registered with the state and have many more regulations and requirements than other business entities. However, the main advantage of C corporations is owners (known as shareholders) have limited liability. C corporations allow for more tax deductions and fewer self-employment taxes but have corporate taxation and may also result in double taxation.
The final type of business entity small business owners may choose to operate as is an S corporation. Similar to C corporations, S corporations have to be registered with the State and have many more regulations and requirements than other business entities. However, one of the main advantages of S corporations is owners have limited liability. Another advantage of S corporations is, unlike C corporations, S corporations are pass-through entities. Since they are pass-through entities, owners avoid corporate taxation or double taxation.
Written By: Tanisha McGaw
Edited By: Rachel Eckert
Hello there, I’m Rachel Eckert: CEO and founder of Mobile Tax Inc. I founded Mobile Tax Inc to fuel my passion for helping people by providing multiple services including tax preparation, planning, resolution, bookkeeping, and accounting. I am an ASFP member and a certified Quickbooks ProAdvisor with a degree in Accounting, along with years of experience in the tax industry. With all of my training and proficiency, I wanted to develop a tax company that clients can trust. I understand the struggles and stresses that come along with filing your taxes and managing your finances, so my objective is to provide easily accessible services that eliminate stress and have my clients feeling at ease. Whether it’s helping our clients remain financially sound, assisting with streamlining business operations, or providing tips for saving money, you can rest assured you have an experienced, IRS-recognized tax professional on your side.