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Serving clients in Palm Springs, California, the Coachella Valley, and Palm Desert, Indian Wells, and surrounding areas in Riverside County
Business Organizations - An Overview
Choosing the proper business organization type for a business is one of the most important decisions that a business owner must make. The type of organization structure will determine how the business handles tax matters and whether there is protection against personal liability. A business owner should consider several factors in choosing a business structure. Such factors may include: the number of individuals in the business, the type of business, profitability of the business, and insurance. An attorney can be your guide to selecting and implementing an effective organizational structure for your business. If you are starting a business, make sure you contact one today.
For profit businesses typically fall into one of three main forms—unincorporated, incorporated, and a limited liability corporation (LLC). An unincorporated business has the option of forming as either a sole proprietorship or a partnership. Incorporated businesses generally form as either a C-Corporation or an S-Corporation. An LLC is a hybrid of the incorporated and unincorporated business structures, combining many benefits of both.
The sole proprietorship is the most common business structure found in today's workplace. This is because it is an easy entity to form and relatively simple to operate. The sole proprietorship and the owner are conisdered one legal entity by the IRS. Therefore, the owner reports all of the business' profits and debts on his or her own personal tax return. The owner is also fully responsible for any liability that the business may incur. His or her personal assets are not protected from the business' creditors. Likewise, any of the owner's personal creditors may pursue the business' assets in order to satisfy the owner's personal debt.
Partnerships come in two forms, general and limited. The IRS views a general partnership as a business run by two or more sole proprietors, each sharing the liability for the business. Partnerships are similar to sole proprietorships in that the owners are not protected from the business liabilities. A partnership can also have limited partners. Each limited partner is only responsible to the extent that he or she has contributed to the business. A limited partnership must have at least one general partner.
A corporation is a legal entity created through a state's laws of incorporation. Each state has its own procedure for incorporating a business, but they most generally follow the Model Business Corporation Act. By incorporating a business, a separate legal entity is formed. This separation shields the business owners from any liability that the corporation may incur, if the corporation itself is sued. Incorporating a business also allows the owners to sell stock in the business to third parties. A corporation typically has a board of directors to oversee the strategy and dealings of the business.
Limited Liability Companies
The LLC combines the ease of management of the sole proprietorship and partnership with the protection from liability of the corporation. The LLC is a relatively new concept and is increasing in popularity. The main purpose of the LLC is to provide individuals with a business entity that avoids some of the complicated regulations of a corporation, but still provides its owners with limited liability. The LLC owners are only liable for the amount that they have invested in the LLC. They are not liable for any further liabilities or obligations of the LLC. Like a sole proprietorship or partnership, though, the LLC itself does not pay federal income taxes. The owners report their profits or losses on their own personal tax returns.
It is important to have a clear understanding of the various business structures to best achieve your business goals. An attorney can provide you with the expertise necessary to select a business type and then make the business a reality.
Frequently Asked Questions about Business Organizations
Q: What is the difference between a C Corporation and an S Corporation?
A: All corporations begin their lives as a C corporation. The owners can elect to become an S corporation by filing a form 2553. This new status allows the owners to be taxed like a partnership or a sole proprietorship. The income of the corporation "passes through" to the owners without the corporation being taxed. The S corporation does come with additional limitations, though, namely a shareholder limit of 75 and U.S. citizenship and residency requirement for shareholders.
Q: What is the difference between an S Corporation and a Limited Liability Company?
A: They are very similar in how they are taxed. The LLC has no restrictions on how many shareholders it may have and who they may be. An S corporation is restricted to 75 shareholders, and they all must be U.S. citizens and residents.
DISCLAIMER: This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.