Tax Savings Strategies : Select your Business Structure
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- 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.
topGeneral 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.
topLimited 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.
topLimited 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.
topLimited 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.
topS 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.
topC 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.
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