Tax consequences and personal liability for your business's obligations and debts are two main issues that may affect your decision about which business structure to select. Contact a business lawyer who can help you evaluate your options.
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Frequently Asked Questions About Business Organizations
Q: What is the difference between a C Corporation and an S Corporation?
A: A C Corporation is so named because it is taxed under subchapter C of the Internal Revenue Code (IRC), while an S Corporation is taxed under subchapter S of the IRC In an S Corporation, the income of the corporation is not taxed at the corporate level as in a C Corporation, but rather it passes through to the shareholders. All corporations generally start out as C Corporations, but shareholders can elect to switch to S Corporation status if the corporation meets certain requirements.
Q: What is the difference between an S Corporation and a Limited Liability Company?
A: The S Corporation and Limited Liability Company (LLC) both provide limited liability for all shareholders and flow-through tax treatment. However, there are numerous requirements that corporations must meet to qualify for S Corporation status that do not apply to LLCs. To qualify as an S Corporation, the corporation must be, amont other things, a domestic corporation with only one class of stock and with no more than 100 shareholders (all of whom are individuals, estates or certain qualifying trusts and are U.S. citizens and residents).
Business Organizations - An Overview
Choosing the proper business organization structure is one of the most important decisions that a business owner must make. The type of organization 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, including the number of individuals in the business, type of business, profitability of the business and insurance. The following overview provides a brief description of some of the more common types of business structures. A corporate and business lawyer at SODEN & STEINBERGER, APLC in SAN DIEGO, CA, can provide you with more information and help you determine which business structure best fits your specific needs.
Sole Proprietorships
A sole proprietorship is an unincorporated business owned by one person. It is a popular business structure because it is simple, easy to form and operate and subject to few rules and regulations. Unlike limited liability companies (LLC) and corporations, no paperwork needs to be filed with the government to create a sole proprietorship. In a sole proprietorship, the owner has complete control over the management of the business and retains all profits of the business.
Partnerships
A partnership is an agreement between two or more persons to engage in business, for profit, on negotiated and mutually agreed upon terms. There are two main types of partnerships: general and limited. General partnerships are generally governed by state laws based on the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA); limited partnerships are governed by state laws based on the Uniform Limited Partnership Act (ULPA) or Revised Uniform Limited Partnership Act (RULPA). Partnerships have distinct advantages and disadvantages.
Corporations
A corporation is a separate legal entity from the business owners, also known as the stockholders or shareholders, and is created by filing incorporation papers with the appropriate state official. Although each state has its own laws regarding the formation of corporations, many follow the Model Business Corporation Act. A state may also have laws governing procedures for businesses incorporated in other states, referred to as foreign corporations, to follow if they wish to conduct business within its borders. While corporations are more complex than sole proprietorships and partnerships, they also offer several benefits.
Limited Liability Companies (LLC)
Limited liability companies (LLCs) are non-corporate entities that provide members with limited liability protection and the right to participate in the management and control of the business.
Choosing a Business Structure
When forming a new business, selecting the business structure is one of the most important decisions you will have to make. Business structures, including the sole proprietorship, partnership (general or limited), corporation and limited liability company (LLC) each have distinct advantages and disadvantages. Determining which structure will best suit the needs of your business and the owner(s) can depend on several different factors, the most important of which are generally liability considerations and tax consequences.
Business Organizations Resource Links
State laws on corporations
Links to state corporate statutes, provided by the Legal Information Institute (LII).
Tax information for partnerships
Tax information for partnerships and partnership-related articles, provided by the Internal Revenue Service (IRS).
Tax information for corporations
Tax resources for corporations, including tax forms, provided by the Internal Revenue Service (IRS).
LLCs, corporations and partnerships
Terms and concepts relevant to LLCs, corporations and partnerships, provided by the Legal Information Institute (LII).
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