Frequently Asked Questions
A sole proprietorship is created simply when a single person, known as the “sole proprietor”, begins a business, owning all of the assets. It is easy, relatively inexpensive and a common choice for an entrepreneur. He or she is taxed on income from the business at their individual tax rate. The disadvantage of a sole proprietorship is the owner’s personal exposure to liability, which not only extends to the debt of the business but also to any lawsuits that may be filed against the business.
When two or more people become co-owners of a business for profit, a general partnership is formed. This is true regardless of whether it is formally registered with the government. Each general partner participates in the management of the business, is a co-owner of the business’s assets, and shares in the profits and losses. As with the operation of a sole proprietorship, each general partner is personally liable for any and all business-related obligations: in other words, for debt and legal liability. While a partnership does file an informational return, a partnership does not pay taxes; instead, the profits of the partnership pass to the owners’ individual tax returns.
A Limited Liability Company (LLC) is a unique business form combining elements of both partnerships and corporations. The liability of owners (called members) is limited to the property invested into the LLC, instead of including their personal assets. The company’s assets are used to resolve the business’s debts. An LLC is not a separate tax entity, although a separate tax return is often prepared, but is similar to a partnership since the profits and losses of the LLC are passed on to the individual owners’ tax returns.
A corporation exists as a separate legal and taxable entity, formed in accordance with the laws of the state of incorporation and in which it intends to operate. The owners of the corporation are protected from the corporation’s liabilities and their exposure is generally limited to the assets contributed to the company, with only certain exceptions to consider.