Choosing the right entity for your business will help you understand and know the legal and tax implications for your business. There are many different types of structures, and understanding each of their benefits are imperative to the success and the future of your business.
What Are Some Types of Entities?
There are many types of entities, each of which have their own regulations determined by state of incorporation, industry, and a number of other factors. As a result, how businesses are taxed varies from entity to entity. Choosing the right entity for your business allows you to understand any of these rules you must follow and prepare properly. Some entities are:
Sole Proprietorships: If you are the single owner of your business, you are automatically considered sole proprietorship. You alone are responsible for assets and liabilities made by your business. Depending on the type of industry and the state you are in, there are certain licenses, permits, and regulations you must follow to run your business.
Partnerships: There are many types of partnerships, but the simple definition is that it is a single business owned by two or more individuals. Within partnerships there is equal contribution of money, property, and labor, as well as division of profits and losses.
While this entity is easily formed and inexpensive, partnerships still face joint and individual liability and responsibility to any debts and decisions made by a partner or an individual. Some of the most common types of partnerships include general partnerships, limited partnerships, and joint ventures.
LLCs: Limited Liability Companies combine of the limited liability of a corporation with the tax and the flexible operational abilities of a partnership. Under this entity, a company member’s personal assets are protect and exempt from any liabilities that the incurred by the enterprise and profits are equally distributed amongst all members as delineated in the operations agreement. However, members are considered self-employed and must pay self-employment taxes towards Medicare and Social Security.
Corporations: This is a legal independent entity that, while owned by shareholders, is independently liable for any action or debts that the business produces. As a result, shareholders assets are protected against any business debt.
Corporations are a great way to generate capital, as they lend legitimacy to an enterprise and can raise funds through selling their stock. However, corporations are strictly regulated by the government, state, and local agencies. The amount of paperwork and recordkeeping is burdensome but is imperative when selecting this specific entity.
Whether you choose to be a sole proprietor or become an LLC, Quality Tax and Accounting Services is here to help you to succeed in your industry. For any questions regarding taxes for any of the entities, or you would like to schedule a consultation, contact our Milford, PA CPA firm today!