There are five basic types of businessownership arrangements:
- Sole proprietorships — Unincorporated business entities where one owner is personally responsible for the debts and liabilities of the business.
- Partnerships — Unincorporated business entities where two or more individuals have agreed to do business together, and where the owners are personally responsible for the debts and liabilities of the business.
- "C" corporations — Incorporated business entities in which the shareholders are not personally responsible for the debts and liabilities of the business. (Technically, shareholders' liability is limited to their investment in the corporation.) A corporation exists apart from the people who are involved in its ownership and operation. The shareholders who also work in the business are considered employees of the corporation for benefit purposes.
- "S" corporations — A corporation with 100 or fewer shareholders that elects to have corporate earnings taxed directly to the shareholders rather than the corporation. The taxation of "S" corporations is similar in most respects to that of partnerships. Also, like partnerships, losses pass directly through to S corporation shareholders.
- Limited liability companies — A limited liability company (LLC) is neither a partnership nor a corporation, but it generally combines the corporate advantages of limited liability with the partnership advantage of pass-through taxation. Like a corporation, an LLC is a legal entity existing separately from its owners. An LLC is created when proper articles of organization (or the equivalent under the laws of a particular state) are filed with the proper state authority, and all fees are paid. State laws also typically impose additional pre- or post-creation requirements.
For more information about business entities, see the Buy-Sell Planning Adviser Guide (Form 2412) and the Buy-Sell Comparison Table (Form 2803).
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