The legal structure of the business and how it functions determine
different types of business entities. Each type has pros and cons,
depending on what you are looking for. Following is a brief
description of the most typical types of business entities.
Figuring Out Which Is Best
Determining which type of business entity is best for you depends
on your current financial picture and what you want to accomplish in
the short and long term.
If, after reading this, you would like assistance in deciding on
and setting up the best type business entity for your situation,
give us a call. (818) 352-0448
When a single person owns and operates a business personally, it is
a sole proprietorship. If the owner is operating the business under
any other name than his own (but it‘s really just him), he usually
must file a "fictitious name" or "doing business
as" with the city, county and/or state.
The owner can legally make any business decisions without the
approval of others. On the other hand, he is personally liable for
anything that happens in the business just the same as if he did it
A sole proprietorship is operated under the owners social security
number and the income and expenses are filed on the individual’s
personal tax return on a "Schedule C" (Profit/Loss From
A partnership is an agreement between two or more people to operate
a business together. In most states a partnership is required to file
some information with the state, county and/or city.
A partnership has to file with the IRS to get an EIN (employer
identification number) number. The partnership does business under
this number rather than the social security number(s) of the partners.
One or more of the partners (in accordance with their partnership
agreement) makes business decisions. All the partners are usually
personally liable for anything that happens in the business.
A partnership files its own tax return and then issues
"K-1" forms to each of the partners showing the amounts to
be incorporated in the partner’s personal tax returns.
A Corporation is a business that has become a unique entity in the
eyes of the law; it is separate and distinct from the person who owns
it. It is regarded by the courts as an artificial person. The
guidelines for the functions and actions of a corporation are laid out
in the Articles of Incorporation and Bylaws. Normally a corporation
has to register with the state in which is does business.
A Corporation has some amount of stock, and the ownership of that
stock determines the ownership of the business. Owning 10% of the
stock, whether that is 10 shares or 5,000, means one owns 10% of the
A Corporation can be "public" or "private,"
depending on how the stock is traded. Stock for a public corporation
is traded in the stock market and anyone can buy shares. The
Securities and Exchange Commission heavily monitors a public
Stock in a private corporation is privately traded, and ownership
of stock can be restricted to certain people or groups. Family owned
corporations are good examples of private corporations.
The stockholders appoint a Board of Directors, the B of D appoints
the Officers. The Officers of the corporation and/or the Board of
Directors normally make business decisions.
A Corporation operates under an EIN (employer identification
number). The corporation itself (not the officers or stockholders) can
be held liable for its actions (except payroll taxes for which the
officers can be personally liable in certain cases).
Corporations file their own tax returns. How the profits are
handled and disbursed to the stockholders is dependent upon what type
of corporation it is.
An "S" Corporation is a type of corporation with a
limited number of stockholders. To become an "S" Corporation
an election form must be submitted to the IRS. This entity is
considered to be a "pass through" entity in that the profits
or losses pass through to the owners of the corporation.
The corporation files a "S Corporation" tax return (1120S
federal form), and then issues statements to each shareholder showing
the allocation of the profit or loss for that shareholder. This is
done on a "K-1" form and is reported on the personal tax
return of the shareholder. This type of corporation is not liable for
any federal taxes – since any taxes would be paid by the individual
shareholders. The State of California Franchise Tax Board does collect
an annual fee for any corporation operating in the state regardless of
profit or loss.
A "C" Corporation is what is typically considered a
"regular" corporation. All publicly traded corporations must
be "C" type corporations. Many privately held corporations
are also classified as "C" corporations.
A "C" corporation files a "C Corporation" tax
return (1120 federal form) and is liable for taxes on any profit
showing. Stockholders realize their profit through dividends if the
corporation pays them. Stockholders can also realize profits through
the purchasing and selling of the corporation stock, although this is
not a direct function of the profit of the company.
Limited Liability Corporation (LLC)
This is a new type of entity only being around for the last few
years. This corporation has all the benefits of a corporation – the
distinct entity separation that a corporation affords, plus the
benefits of a partnership in that the profits or losses are passed
through to the individual members of the LLC.
The LLC files a tax return, which allocates profits, and losses to
the members via a form K1 like a partnership. There is no Federal
income tax liability. The State of California Franchise Tax Board does
collect an annual fee for any corporation operating in the state
regardless of profit or loss.
A Trust is a fiduciary relationship. Fiduciary is a person, company
or association that holds assets in trust for a beneficiary. The
fiduciary or trustee is charged with the responsibility of
managing the trust assets in accordance with the purposes and
instructions set down in the trust agreement. The responsibilities are
much the same as the executor of a will.
There are a few different types of trusts each having a specific
nature designed to hold or manage assets for a beneficiary. Trusts
generally have the benefit of being able to protect assets and are a
separate entity from those who granted them or from the beneficiaries.
A trust files a tax return (form 1041) and is liable for any taxes
resulting from profits generated by the trust.
If you would like more information on trusts and what they can be
used for give us a call, we can provide some useful information and