There are no formal requirements for a sole proprietorship. It doesn’t require an employer identification number (EIN) unless the entity has employees. The owner can sell the business or its assets as desired, convert to another entity or dissolve at the owner’s whim.
On the negative side, the owner’s personal assets are subject to the entity’s liabilities and legal claims. The entity is limited to one individual. All income is reported on the individual’s income tax return and is subject to self-employment tax.
General partnerships do not require formal formation procedures besides a partnership agreement. The entity should file for an EIN and file a partnership return, allocating income and expenses to the partners. A general partnership is similar to a sole proprietorship except it involves two or more partners.
Limited partnerships are similar to general partnerships except one or more of the partners is considered a limited partner and is considered a separate legal entity. Limited partnerships must file a certificate with the
Secretary of State of the state of formation. Limited partners are not liable for the debts and obligations of the partnership as long as they do not become too actively involved in the management of the partnership.
Limited liability partnerships(LLP) are also separate legal entities. LLPs must file with the state and although the rules vary by state, usually required insurance to cover the liabilities of the partnership. Also, many states
restrict the entity to professionals, such as attorneys, accountants and other similar disciplines.
Limited liability companies(LLC) are not by definition partnerships but are treated as partnerships for federal tax
purposes. It is considered a separate legal entity and requires filing at the state level. There are few restrictions on the type of business and the type of entities who can be members. Members have limited liability even though are actively participating in the business.
Corporations are separate legal entities from the shareholders. Generally, the same formalities are required whether the shares of the corporation are trader on the New York Stock Exchange or held by a single shareholder. Management is usually done by a board of directors elected by the shareholders. The organization has an unlimited life and requires a formal election to dissolve the organization. The profits of a corporation are taxed at the entity level and any dividends are also taxed when received by the shareholders.
S Corporations are similar to so called C Corporations except there are restrictions on how many and what type of organizations can be shareholder. Also, the earnings are not taxed at the entity level and all earnings flow to the shareholders for taxation.
If you are interested in forming or changing an entity, please call Gary Bloome PA and we can lead you through the process.