If you are a new business just starting out, or have been in business for awhile but are not sure of the appropriate “Business Status”, this blog post will definitely help. Let’s look at your different business status options.
Business can be conducted in a variety of forms, from the sole proprietorship, to the publicly-held multinational corporation. In between (and generally where most small businesses fall) are the following:
- GPs are general partnerships,
- S Corps are small or closed corporations that have elected S status for federal income tax purposes,
- LLPs are limited liability partnerships,
- LLCs are limited liability companies, and
- PCs which are professional corporations.
Here’s some context and detail on each of the above partnerships, to help you determine the best status for your business.
A sole proprietorship is a business owned by a single individual in his/her own name. While a sole proprietor can have employees, s/he is considered self-employed and can never be an employee of the business. Sole proprietors report their business income and expenses on Schedule C of the Form 1040 for federal income tax purposes.
Sole proprietors are personally liable for their own negligence, and as employers, they are vicariously liable for the work-related negligence of their employees. There are also personally liable for the business’ obligations, such as wages, lease payments, business loans, and vendor invoices. As such, a sole proprietorship is usually not a recommended form for doing business.
A general partnership is a group of individuals who share profits and losses of the partnership’s business. Partnerships are treated as separate entities some purposes and pass-through entities for other purposes. Partnerships, generally, do not pay any income tax. Instead, any net income or loss shown on the partnership return is allocated to the partners according the partnership agreement. Partners pay tax on their allocated shares whether or not net income has actually been distributed to them in cash. The partners themselves are considered to be self-employed.
Partners are personally liable for partnership obligations. Each partner is considered an agent of each other partner and is personally liable for the negligence and contractual obligations of each partner. This is the main reason for the popularity of S corps, LLPs, and LLCs.
In the next post I will discuss S Corps., LLPs, LLC’s, and Professional Corporations.
© 2019 Rhonda L Foster. All Rights Reserved.
