Common Forms of Businesses

One of the most important part of starting a business is deciding what form entity the business will be. The form of business you choose will determine which income tax form you have to file, as well as what will be your liability and system of record keeping. The most common forms of business are sole proprietorship, partnership and corporation. New types of business structure are recently introduced they are Limited Liability Company (LLC) and S corporation. In an LLC, the owners are basically self-employed and are allowed to have limited personal liability for the debts and action of the LCC. While an S corporation is a domestic corporation having the tax benefits of sole proprietorship and the advantage of corporation. It can avoid double taxation and is generally exempted from taxes other than the tax on capital gains and passive income.

Businesspeople

Sole Proprietorships

Sole proprietorship is a business entity owned by only one owner called the proprietor. It does not have the limited liability benefits enjoyed by corporations, which are legally recognised as an independent entity separate from person forming it. This is because a business entity under sole proprietorship is not separate from its owner, which means that all debts and liability of a business are debts and liability of its owner. When it comes to taxation responsibility, sole proprietorship only pay personal income tax on the profits it made. The record keeping and accounting is much simpler, and it does not need to be concerned with double taxation. However, with this type of business, getting bank financing and raising capital fund can be difficult because shares of business can never be sold. This form of business is suitable for individuals wanting to own their own small business.

My business negotiation with client

Partnership

Under a partnership, the business entity is owned by two or more people who join to carry on a commercial trade as partners. Each partner contributes skill, money or property to the business, and in return gets a share in the profits/losses of the business. When it comes to taxation, regulations may vary between jurisdictions. But commonly, a partnership’s tax is assessed at the entity level but is applied to the partners. This means that the business entity does not pay taxes on its income, but instead, the partners of the entity pay their taxes individually based on their share.

Businessman and Businesswoman Shaking Hands

Corporations

A corporation is a legal business entity formed by several individuals who will become its shareholders. The existence of the entity is separate and distinct from its members or shareholders. It is like a real person who can enter into contracts, pay taxes separately from its owners, and acquire properties under its title. One of the good thing about a corporation is that its liabilities and debts are not a direct burden of its shareholders. This means that since it is a separate legal entity, the personal assets of its shareholders are not at risk for liquidation to pay-off corporate debts.

Corporation assembly meeting