Business Ownership 101
When you first become a business owner, you must decide whether to form a LLC, a partnership, a sole proprietorship, or a corporation. This is an important decision that only the business owner can make because it will affect how the business is ran, but it will also affect how the business pays taxes. To make the best decision for your business it is best to learn about each type of business, including the taxation method used.
One of the most popular businesses that business owners are starting is the LLC. Starting LLC businesses is not very hard to do, and you get a variety of benefits. The reason for this is that the LLC is a hybrid, a combination of a partnership and a corporation. With an LLC, you get the same protection that is provided to a corporation, but the LLC is taxed like a partnership. In essence, you get the best of both business forms.
To start a partnership you will need to have at least one other person starting the business with you. If you decide to start a partnership, you will need to make the decision of starting a general partnership or a limited partnership, which will depend on how the assets and liabilities will be divided up. No matter which style of partnership you choose they both benefit from pass through taxation. Pass through taxation means any profit or loss is claimed on the owner’s individual tax forms by filling a Schedule C along with the Form 1040.
A sole proprietorship is where one person owns the business; the business is also taxed by pass through taxation. In a sole proprietorship, only one person owns it so they are solely responsible for nay liabilities and debts that the business incurs, but they also do not have to share any of the profits with anybody else. Like the partnership, the sole proprietorship taxes are shown on the individual business owner’s personal income taxes through a Schedule C.
A corporation is a separate legal entity; the shareholders are not responsible for any liabilities or debts that the corporation incurs. The number of shareholders that own a corporation can range from one shareholder to an unlimited number of shareholders. The corporation does not have pass through taxation, instead the profits of the corporation are taxed at the corporate level, but this doesn’t include the taxes that the shareholders must pay on any dividends that they receive from the corporation. Those dividends are taxed at the individual shareholders level.
