The business entities commonly encountered in the United States are as follows: sole proprietorship, partnership, C Corporation, S Corporation and limited liability company. Each has its own unique advantages and disadvantages.

Sole Proprietorship

A sole proprietorship is a business owned by a single individual. There are generally no start-up costs or state filings required to begin a sole proprietorship. The owner is considered self-employed, not an employee. The entity is dissolved upon the cessation of the business or death of the owner. A sole proprietor has unlimited liability. However, the owner has complete control over business management and operations. Some potential disadvantages to this business type are that it is often difficult to raise capital for its formation and ownership of the business may not be transferred.

A sole proprietorship is not a taxable entity. While the sole proprietor is personally liable for taxes, he may take advantage of any “pass through” income or losses.
A partnership is created when two or more people pool their money and resources to share in the proportional profits and losses of the business. Partners are self-employed, not employees. The partnership continues to exist until the partners dissolve it. There are two types of partnerships: general partnership and limited partnership. The primary difference between the two is that general partners manage the business and are liable for its debts; limited partners may not manage the business and are not liable for its debts. However, a limited partner can lose his contributing capital upon the partnership’s dissolution.

There are no separate business taxes on partnerships, but the partnership must file a yearly statement of each partner’s earnings or losses. Each partner is then personally responsible for his taxes.

C Corporation

Most large businesses are C corporations. The owners of the business are those individuals holding its shares. The directors, whom the shareholders elect, manage the business. The main advantage is that even if only one person owns the corporation, the owner is generally not personally responsible for the debts of the business. Another advantage is that it is possible to raise starting capital through the sale of shares and these shares are easily transferable. A disadvantage is the potential for “double taxation” because the corporation must pay taxes on its income and the shareholders must pay taxes on any dividends they receive from the corporation.
S Corporation
This business entity is used by smaller businesses having less than 75 shareholders. There are many similarities to the C Corporation, including limited liability for shareholders. However, shareholders must pay taxes on the corporation’s income whether or not they personally earned income. A shareholder can reduce his tax liability by claiming business losses, but he must be an active participant in the business.

Limited Liability Company (LLC)

A limited liability company is not a corporation, but it is used by many small businesses because it has the limited liability protection of a corporation and the “pass through” taxation features of a sole proprietorship or partnership. An LLC requires a state filing for its formation and the duration of its existence is determined by the state in which it is formed. An operating agreement outlines the management of the business. Depending on the operating agreement, it may be possible to sell interests in the LLC to raise capital and to transfer ownership interests.