Sole Proprietor
General Partnerships
Limited Partnerships
Limited Liability Partnerships
(LLP)
Limited Liability Companies
(LLC)
S Corporations
C Corporations
Sole Proprietorships
An
entrepreneur may opt for the sole proprietorship because of the advantages
it offers to small businesses and the self employed. There is better control
and business administration possible since there is only one owner, who can
make decisions quickly without having to consult others. In most cases,
there are no legal formalities to forming or dissolving a business. In many
jurisdictions, a sole proprietorship files simpler tax returns to report its
business activity.
Strategy: Section 105
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General Partnerships
General
partnerships are associations of two or more persons as co-owners to carry
on a business for profit. The co-owners personally share the risks and
rewards of all phases of the business. Because of tax rules and regulations,
partnerships are increasingly complex entities. Each partner is jointly
severally liable for the partnership’s obligations. Like proprietorships, a
partner’s personal assets can be seized to satisfy partnership debts.
Strategy: Section 105
Strategy: Section 125
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Limited Partnerships
Limited
partnerships are similar to general partnerships except that one or more of
the partners has limited participation in the venture’s risk. This form of
organization is a legal device that enables limited partners to be passive
investors in a partnership, normally limiting their liability to the extent
of their investment and enabling any general partners to manage and control
day-to-day operations. A general partner’s assets can be seized to satisfy
debts of the limited partnership.
Strategy: Section 105
Strategy: Section 125
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Limited Liability Partnerships
Limited
liability partnerships (LLP’s) are a special type of general partnership
that exists under the laws of many states. Relatively new, they were enacted
in response to the concern that a partner of a professional firm can be held
liable for the malpractice of another partner in the same firm. LLP’s are an
alternative available in some states that do not allow professional firms to
organize as LLC’s.
LLP partners
remain personally liable for the commercial and other obligations of the
entity, their own acts and omissions, and for the acts and omissions of
persons under their supervision. However, LLP partners generally not liable
for acts and omissions by the other LLP partners and non-supervised
employees. Thus, LLP’s provide less liability protection than LLC’s, but
more than general partnerships.
Strategy: Section 105
Strategy: Section 125
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Limited Liability Companies
Limited
liability companies (LLC’s) are business entities created under state law
that can be used in all states. Limited liability companies are owned by
members and combine the tax advantages of a partnership with the liability
protection of a corporation. As a result, the LLC structure is often
compared to an S corporation. In many cases, LLC’s are more flexible than S
corporations. The major drawback of LLC’s is that laws are new and
relatively untested in non-tax matters. Each state establishes its own LLC
rules and characteristics.
Strategy: Section 105
Strategy: Section 125
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S Corporations
S corporations
are hybrid corporations that combine some of the tax advantages of a
partnership with the liability protection of a corporation. Start-up
businesses often consider S corporation status because profits and losses
are passed through to the shareholders with no corporate tax imposed.
Strategy: Section 105
Strategy: Section 125
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C Corporations
Corporations
are business entities created under state law. They are characterized as
artificial persons created for the purpose of conducting business. As such,
they can hire employees, enter into contracts, acquire assets and incur
liabilities. An important feature is that they generally enable their owners
(shareholders) to limit their liability to the extent of their investment in
the corporation.
Strategy: Section 105
Strategy: Section 125
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