Business Entities

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When creating a business, it is important to understand the type of organization your business will be. This is vital when considering applicable taxes, fees, and personal liability. Different companies have different taxes at federal and state levels. Some of the companies listed below are not allowed in certain states, while others have restrictions or additional taxes. Be sure to review applicable taxes in your state before progressing with your business. In the United States, business entities include Sole Proprietorships, Partnerships, Corporations, and Limited Liability Companies.

In a sole proprietorship, one person owns and operates the business, receiving all profits, but responsible for all debts and loans.

A partnership is a business entity jointly owned and operated by two or more partners. Depending on the partnership, control and personal liability differs between partners. In a General Partnership, each partner has the same rights and responsibilities. Each partner is responsible for debts and liabilities, and is liable for legal action. However, partners are able to include company profits on individual tax returns at rates lower than for a business.

In a Limited Partnership, each partner can restrict their personal liability, depending on business investment. On the other hand, at least one partner must accept unlimited liability. Limited partners do not have a say in business management.

In a Limited Liability Partnership, individual partners have limited liability for the debts of the business and the misdeeds of other partners. However, they are still liable for malpractice or professional negligence. Depending on the state, certain tax authorities may view Limited Liability Partnerships as non-partnerships and tax accordingly. In some states, only certain types of practices can be a Limited Liability Partnership. This may include law, accounting, and architectural firms.

In a Limited Liability Limited Partnership, the general partner is not responsible for the partnership’s debts. Investors have no debt liability. This type of partnership involves less expense, paperwork, and risk than a Limited Liability Partnership. Whether a company can be classified as a Limited Liability Limited Partnership varies by state.

A corporation is made up of many owners acting as a single entity, many of which will not be active in operating the business. The corporation is run by a board of directors and can be either public or private. By law, corporations are considered legal persons, entitled to the same rights and responsibilities as a human being.

In a Limited Liability Company, owners have limited liability, but are not part of a corporation. Common abbreviations include LLC, LC, and Ltd Co. It is a private company with the pass- through taxation of partnerships or sole proprietorships, and the limited liability of a corporation.

In a Professional Limited Liability Company, licensed professionals who would not be able to form a Limited Liability Company due to state laws, but still want the benefits of an LLC, instead form a Professional Limited Liability Company. Licensed professionals include lawyers, engineers, architects, and doctors. Concerning business matters, a PLLC has limited liability, but is still liable for malpractice suits.

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