Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

forms of business ownership by abe20


									       Forms of Business

                                                                              Last revised

                     University of Nevada, Las Vegas, College of Business
                             4505 Maryland Parkway, Box 456011
                                   Las Vegas, NV 89154-6011

(702) 895-4270, Fax (702) 895-4273   Website:      Email:
The Nevada Small Business Development Center (NSBDC) is a statewide resource for
business assistance, providing a unique array of services, expertise and training in all
areas including starting, growing, and developing a business. The NSBDC also offers
information and guidance in understanding and complying with environmental and safety
regulations. In addition, the NSBDC provides useful information and analyses of the
economy, environment and demographic data to help businesses, government and other
organizations promote economic growth in their communities.

       We are pleased to assist you in your efforts to develop and grow your business!

                 To learn more about the services we offer, contact the NSBDC at:
                    (702) 895-4270 or visit our website at

      Las Vegas Office                                                 Henderson Office
851 E Tropicana, Bldg 700                                    Henderson Business Resource Center
4505 Maryland Pkwy.                                          112 Water Street. #108
Box 456011                                                   Henderson, NV 89015
Las Vegas, NV 89154-6011                                     (702) 992-7208
(702) 895-4270

     North LV Office                                         Pahrump Office
North LV Chamber of Commerce                                 Rural Nevada Development Corporation
3345 W. Craig Rd. Ste B                                      1301 South Highway 160, NSB
N Las Vegas, NV 89032                                        2nd Floor
(702) 895-4270                                               Pahrump, NV 89041
                                                             (775) 751-1947

Business Environmental Program/ Safety Assistance Service
P.O. Box 15225
Las Vegas, NV 89114-5225
(702) 866-5962
The information, materials and services provided by or through the Nevada Small Business Development Center (NSBDC) do not
constitute legal advice and should not be considered a substitute for legal accounting and other professional advice. The information
you receive from the NSBDC is presented without any representation or warranties whatsoever, including as to the accuracy or

Small Business Development Centers are programs supported by the U.S. Small Business Administration and extended to the public
on a non-discriminatory basis. Reasonable accommodations for persons with mental or physical disabilities will be made if requested
at least two weeks in advance. Contact your local NSBDC office or the State Office at 775 -784-1717 to make arrangements. SBA
cannot endorse any products, opinions or services of any external parties or activities.

This material is based on work supported by the U.S. Small Business Administration. Any opinions, findings, conclusions or
recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA.

                                                            Page 2 of 7                                          Revised 7/13/05

Which is the right one for your business?
One of the first executive decisions you’ll make for your new business is choosing the type
of legal organization that’s best for you. The choice you make is important because it will
determine what your business can and cannot do, what will happen if someone sues you,
and how both you and your business are taxed. There are basically four ways to organize
a business. Listed from the simplest to sophisticated, they are:
    Sole proprietorship
    Partnership
    Corporation
    Limited liability company

Sole Proprietorship
A sole proprietorship is, as the name suggests, a business with one owner. Of the four
types of organization it is the most common. A business organized as a sole proprietorship
isn’t separate from its owner, it is the same legal entity, the owners alter ego if you will.
The owner is the business and the business is the owner. They are the same legal entity,
they’re inseparable.


The main advantage of the sole proprietorship is simplicity. This type of business is easy
to set up and administer. Also, since there are few legal requirements for the sole
proprietorship, starting one is affordable. Basically all you have to do is get a business
license and start operations.

The disadvantages of the sole proprietorship stem from its very nature. The business and
the business owner are the same entity. Since the business and the business owner are
the same, lawsuits brought against the business are actually brought against the owner.
The owner’s personal assets (home, cars, etc) can be taken to settle claims against the
business. The tax breaks for sole proprietors may be limited by IRS regulation.

The sole proprietorship is known as a pass-through entity. This means that the income
and expenses of the business are reported on the owner’s personal (1040) tax return.
This is good if the business doesn’t make a profit because it will give the owner a personal
tax deduction equal to the amount of the business loss. But if the business makes a profit,
it will increase the owner’s income by that amount and may be subject to self employment
and income tax. The owner is liable for any taxes.

                                        Page 3 of 7                          Revised 7/13/05
A partnership is similar to a sole proprietorship but it has two or more owners. Like the sole
proprietorship, the partnership is not a legal entity separate from its owners. A partnership
is formed when two or more entrepreneurs decide to start a business together. The details
of this arrangement (how the money is divided, etc.) are outlined in a written document
called a partnership agreement.
Partnerships have the same advantages and disadvantages as sole proprietorships with
one additional drawback. A partner can be held liable for acts of the other partners, thus
increasing personal liability.
Tax treatment of the partnership is also slightly different. Although it is a pass— through
entity and doesn’t pay its own income tax, the partnership files an informational return with
the IRS (Form 1065), and the pro—rata share of its income or loss are shown on each
partner’s personal return. The partners are responsible for any taxes due.

The corporation was conceived to solve the typical problems of the sole proprietorship and
partnership. Incorporating allows a group of business owners to act as one, like a part-
nership, with one important advantage. Since the corporation is a separate legal entity ca-
pable of being sued, it can protect its owners by absorbing the liability if a lawsuit is
brought against the company.
A corporation is essentially an “artificial person” created and operated with the consent of
the state where it’s incorporated. Legally, a corporation is a person like the rest of us, but
only on paper. A corporation is brought to life when someone files a document, known as
the articles of incorporation, with a state agency. Corporations must have at least one
stockholder. Some states require two or more.
Since a corporation is a separate legal entity the corporation technically owns and op-
erates the business for the shareholders, under their total control. This separation provides
a legal distinction between the owner(s) and the business, and provides three important
       1. It allows the owner(s) to hire themselves as employees and thereby participate
          in company funded employee benefit plans like medical and dental insurance,
          and retirement plans.
       2. Since the owner(s) and the company are now two separate legal entities,
          lawsuits can be brought against the company instead of the owner(s)
       3. When debt is incurred in the company name (a separate legal entity) the
          owner(s) are not personally liable and their assets cannot be taken to settle
          company obligations, except in rare circumstances where officers act with
          reckless abandonment or with complete disregard for laws.

                                         Page 4 of 7                          Revised 7/13/05
S Corporations
All corporations, when they are organized, are regular “C” corporations. They become “S”
corporations when the shareholders file a special form (Form 2553) with the IRS. Electing
S corporation status allows a corporation to be taxed like a partnership, making it a flow-
through entity. Accordingly, the S corporation’s profit or loss is reported on its owner’s
personal tax return. The S corporation is an IRS (tax) designation only.
S corporation status is desirable for corporations that are not making a profit because the
corporation’s loss is passed through to the owner’s personal tax return as a deduction.
Conversely, if the business is making a profit, additional income is passed to the business
owner’s personal tax return, increasing both state and Federal income taxes.
Some business corporations begin as S corporations because losses are usually incurred
in the start-up years. When the business starts to make a profit, it is best to revert back to
C corporation status.
Operating as a C corporation keeps business income off the owner’s personal tax return,
and allows the owner to benefit from increased deductions that are available to C
corporations. However, corporations are taxed at an IRS tax rate that may be higher than
personal tax rates.

Limited Liability Companies (LLC)
A limited liability company is the newest form of business organization, gaining popularity
in the last five years. A separate entity like the corporation, it offers limited liability
protection to its owners, but it’s taxed like a partnership, making it a pass—through entity.
The limited liability company was developed to replace the limited partnership, another
type of business organization. Limited partnerships were typically used in real estate
development companies where investor partners received limited liability protection along
with favorable tax deductions from losses generated by a project so designed. The limited
partnership, however, did not give limited liability protection to all partners, hence the ar-
rival of the limited liability company, which does. (Essentially, the LLC is an S corporation
without the 75 shareholder limitation.)

So which is best?
Well, considering that sole proprietorships and partnerships don’t offer limited liability
protection, the race appears to be between corporations and LLC’s for which the only
basic difference is how they’re taxed, and how they affect their owner’s personal taxes.
Between these two, the corporation offers more tax planning options with the ability to file
as either an S corporation or a C corporation.

Source: Consumer News: Consumer Publishing Group 1-800-677-2462

                                          Page 5 of 7                         Revised 7/13/05
                                       Forms of Business Ownership Quick Reference

                            Proprietorship                   Partnership                  Corporation (S or C)                   LLC

                      Single owner business        Business with partners            Single or multiple owner     Single or multiple owner
Best Suited For
                      Taxes or product liability   Taxes or product liability are     business                      business
                       are not a concern             not a concern                     Owners need company          Owners need limited
                                                                                        funded fringe benefits and    liability but want to be
                                                                                        liability protection          taxed as a partnership

Type of Entity        Inseparable from owner       Inseparable from owner            Separate legal entity        Separate legal entity
                                                    Can have debt or property         Owners hired as employees    Owners hired as
                                                     in its’ name                      Owners called shareholders    employees
                                                                                                                     Owners called members

                      Inexpensive to set up        Inexpensive to set up             Limited liability            Limited liability
Main Advantages
                      Few administrative duties    Few administrative duties         Company paid fringes (C      Pass—through entity
                                                                                        Corp)                        Unlimited number of
                                                                                       Tax savings through income    owners
                                                                                        splitting (C corp)           Capital easy to raise
                                                                                       Capital easier to raise       through sale of interests
                                                                                        through sale of stock
                      Unlimited liability          Unlimited liability               Could be costly to form      Can be costly to form
Main Disadvantages
                      No tax benefits              Responsible for partners          More administrative duties   More administrative duties
                      Business dissolves at         acts                              S Corp is limited to 70      Profits incr ease owners
                       death of owner               No tax benefits                    shareholders                  personal taxes
                      Profits increase owner’s     Legally dissolves upon
                       personal taxes                change or death of one
                                                    Profits increase owners
                                                     personal taxes

                      Flow-thru entity             Flow-thru entity                  C corp pays its own taxes    Flow thru entity
                      Owner is responsible for     Partners are responsible for      S corp is flow-thru          Owners are responsible for
                       any taxes due                 any taxes due                     C corp files Form 1120        any taxes due
                      File Schedule C with form    Reported on form 1065             S corp files Form 1120S      Reported on form
                       1040                                                                                           Schedule C, 1065 or 1120
Forms of Business Ownership Quick Reference

To top