Business Formation

A sole proprietorship is a business structure where one person owns the business. Starting is easy and less expensive. States do not require the filling of formal formation documents for a sole proprietorship. The company is not a separate legal entity from the owner, which makes the owner personally responsible for any debts and liabilities of the business. The business's income and expenses are reported on the owner's tax return. 

A sole proprietorship is a good option for low-risk businesses and a great way to test a business idea before formally forming a company.

A partnership is a simple business structure with two or more individuals or entities owning and operating a business jointly. The business and its owners are considered one entity for legal and tax purposes. By state default laws, partners share the profits and losses of the business equally Each partner is responsible to report on their personal tax returns their profit or loses. additionally, partners are personally liable for business debts equivalent to the percentage of profit they receive. 

The roles, responsibilities, and profit-sharing of each partner can be tailored in the partnership agreement.

An LLC is a formally established business structure that requires state filing. An LLC can be owned by one individual/entity or have an unlimited number of owners. Each owner of an LLC is called a member. LLCs combine the best features of partnership and corporation, with the pass-through tax option and protection of personal assets of the members that it provides. To start and maintain an LLC requires a fee to be paid at the time of the filing of the Article of Organization and annually or biennially thereafter, with the desired state. 

An LLC is an attractive alternative to a corporation because of the lower fees and single-level tax options.

A corporation is a separate legal entity from its owners, providing limited liability protection to the owners. Corporations are owned by shareholders and operated by a chief executive officer (CEO)- who can also be a shareholder. Establishing a corporation tends to be more expensive due to the increased regulations corporations face. Corporations are taxed on two level-the corporation pays income taxes as a separate entity and the shareholders pay taxes on the dividends (income) they receive. Corporations can raise capital by selling stock to the public.

There are two main types of corporations: 

• C-corporation - usually for larger companies and is the default corporation tax structure.

• S-corporation - provides the pass-through tax benefit allowed for smaller companies, yet it adheres to more regulations than an LLC.