There’s a lot to brag about once you’ve grown a business from a startup to a successful and growing enterprise. But one key to the successful operation of any company is selecting the appropriate business structure. While the sole proprietorship and partnership are popular business structures, some people choose to operate a business as a corporation or limited liability company to ensure their personal assets are not subject to the judgments of any legal actions against their businesses.
Many entrepreneurs begin operating their business as sole proprietorships. The entrepreneur who conducts business using this structure is under no requirement to register with the company’s home state. The owner simply opens the doors and starts earning revenue.
In the eyes of the state, the sole proprietorship and its owner are one legal entity, so a company’s earnings and losses are reported on the individual’s personal tax return. In like manner, the individual is liable for his company’s debts. If a judgment is issued following a lawsuit against a sole proprietorship, the company’s owner is liable for the debt, which means his assets are at risk.
Two or more people can own a partnership. Like a sole proprietorship, there’s no requirement to file paperwork with the state to begin operating a business with your partner. Again, like a sole proprietorship, a partnership is official when you begin operations.
According to state law, the partnership and its owners are one and the same, so the partners report the company’s income or loss on their personal income tax returns. Likewise, the partners are personally liable for the company’s debts or any judgment that results from a lawsuit against the partnership.
C Corporation and S Corporation
C corporations and S corporations are legal and tax entities independent of the owners and those who manage them. Consequently you can limit your personal liability for your company’s debts or court judgments against your company if you structure it as a C or S corporation.
Whereas owners of the S corporation report the corporation’s income or loss on their personal income tax returns, the C corporation, rather than its owners, reports its own business earnings and losses. In turn, the owners of the C corporation report the dividends they are paid and the money they draw from the business -- salaries and bonuses -- on their tax personal returns.
Corporations must register and file paperwork with the state to operate using the corporate business structure.
Limited Liability Company
A limited liability company, or LLC, is similar is some ways to a corporation and a sole proprietorship or partnership. The owners of an LLC have limited personal liability for a company’s debts or court judgments against the company. But as with a partnership, the LLC owners report their shares of business income or loss on their personal tax returns.
To operate an LLC, the owners must file paperwork with the state.