Sole Proprietorship
A sole proprietorship is owned by one individual doing business in his or her own name. Because the owner is doing business in an individual name, there is no need for all of the legal formalities that accompany other forms of doing business, except for registering a fictitious name and obtaining an employer identification number and appropriate occupational or other licensing. The biggest disadvantage of this form of entity is that the owner is subject to unlimited personal liability for debts and claims against the business. In addition, the owner must pay income taxes and self employment taxes on all business income.
Partnership
A partnership is an association formed by two or more people or entities to do business for profit. While a partnership is a separate legal entity, it is not a taxpaying entity. There are two forms of partnership, general and limited.
In a general partnership, like a sole proprietorship, there is unlimited liability of all of the partners, who are all general partners. While there are no required legal formalities to form a general partnership, most operate according to a partnership agreement. A limited liability partnership is a special form of general partnership that provides the general partners with limited liability.
A limited partnership has at least one general partner and at least one limited partner. A certificate of limited partnership must be filed with the state in which the partnership was formed and is to operate. General partners have unlimited liability while each limited partner is subject to liability only up to the amount of that partner's investment in the partnership. The trade-off for that limited liability is that the limited partners cannot be actively involved in the operation of the business or they will lose their limited partner status. A limited liability limited partnership is a special form of limited partnership that provides general partners, as well as limited partners with limited liability and while limited partners cannot participate in management, they can be actively involved in operation of the business.
In any case, the partnership does not pay income taxes on partnership income. Income is passed through to the partners who report it on their personal tax returns. Likewise, the partners can take advantage of partnership losses as offsets to their personal income, subject to certain limitations.
Corporation
A corporation is a separate legal entity owned by one or more individuals or entities. The corporate form of business requires certain legal formalities to be observed. Upon formation, Articles of Incorporation must be filed with the state in which it is formed and is to operate. By-laws govern the operation of the corporation and there are required annual report filings and meetings that must be documented. Stock certificates are issued to shareholders in return for their investment in the corporation. The biggest advantage to this form of business entity is the limited liability of all shareholders.
There are two types of corporations; regular or "C" corporations and "S" corporations.
In a C corporation, the biggest disadvantage is that corporate income is subject to federal income tax twice; once to the corporation on its income and again on any dividend distributions to the shareholders, In addition, C corporations are subject to the 5.5% Florida state corporate income tax and shareholders cannot offset their personal income with corporate losses.
In an S Corporation, which requires filing of an election with the IRS, there are limitations on the number and type of shareholders that can own its stock. There are also limitations on the classes of stock and the deductibility of certain expenses. The most appealing characteristic of an S corporation is that it is treated like a partnership for federal tax purposes. The income is passed through to the shareholders who, like partners in a partnership, can offset corporate losses against their personal income, with certain limitations. In addition, an S Corporation, also like a partnership, is not subject to the 5.5% Florida corporate income tax.
Limited Liability Company
A limited liability company is a recent addition to the forms of business entity available. It combines the advantages of limited liability of a corporation and the tax treatment of a partnership. The state and federal formalities to form and operate an LLC can be complex. In addition, like an S corporation and partnership, it is not subject to Florida 's state corporate income tax.
Other Forms
There are various other forms of entities, including limited liability partnerships,
