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The legal structure of the business and how it functions determine different types of business entities. Each type has pros and cons, depending on what you are looking for. Following is a brief description of the most typical types of business entities.

Figuring Out Which Is Best
Determining which type of business entity is best for you depends on your current financial picture and what you want to accomplish in the short and long term.

If, after reading this, you would like assistance in deciding on and setting up the best type business entity for your situation, give us a call. (818) 352-0448

Sole Proprietorship
When a single person owns and operates a business personally, it is a sole proprietorship. If the owner is operating the business under any other name than his own (but it‘s really just him), he usually must file a "fictitious name" or "doing business as" with the city, county and/or state.

The owner can legally make any business decisions without the approval of others. On the other hand, he is personally liable for anything that happens in the business just the same as if he did it himself.

A sole proprietorship is operated under the owners social security number and the income and expenses are filed on the individual’s personal tax return on a "Schedule C" (Profit/Loss From Business).

Partnership
A partnership is an agreement between two or more people to operate a business together. In most states a partnership is required to file some information with the state, county and/or city.

A partnership has to file with the IRS to get an EIN (employer identification number) number. The partnership does business under this number rather than the social security number(s) of the partners.

One or more of the partners (in accordance with their partnership agreement) makes business decisions. All the partners are usually personally liable for anything that happens in the business.

A partnership files its own tax return and then issues "K-1" forms to each of the partners showing the amounts to be incorporated in the partner’s personal tax returns.

Corporation
A Corporation is a business that has become a unique entity in the eyes of the law; it is separate and distinct from the person who owns it. It is regarded by the courts as an artificial person. The guidelines for the functions and actions of a corporation are laid out in the Articles of Incorporation and Bylaws. Normally a corporation has to register with the state in which is does business.

A Corporation has some amount of stock, and the ownership of that stock determines the ownership of the business. Owning 10% of the stock, whether that is 10 shares or 5,000, means one owns 10% of the company.

A Corporation can be "public" or "private," depending on how the stock is traded. Stock for a public corporation is traded in the stock market and anyone can buy shares. The Securities and Exchange Commission heavily monitors a public corporation.

Stock in a private corporation is privately traded, and ownership of stock can be restricted to certain people or groups. Family owned corporations are good examples of private corporations.

The stockholders appoint a Board of Directors, the B of D appoints the Officers. The Officers of the corporation and/or the Board of Directors normally make business decisions.

A Corporation operates under an EIN (employer identification number). The corporation itself (not the officers or stockholders) can be held liable for its actions (except payroll taxes for which the officers can be personally liable in certain cases).

Corporations file their own tax returns. How the profits are handled and disbursed to the stockholders is dependent upon what type of corporation it is.

"S" Corporation
An "S" Corporation is a type of corporation with a limited number of stockholders. To become an "S" Corporation an election form must be submitted to the IRS. This entity is considered to be a "pass through" entity in that the profits or losses pass through to the owners of the corporation.

The corporation files a "S Corporation" tax return (1120S federal form), and then issues statements to each shareholder showing the allocation of the profit or loss for that shareholder. This is done on a "K-1" form and is reported on the personal tax return of the shareholder. This type of corporation is not liable for any federal taxes – since any taxes would be paid by the individual shareholders. The State of California Franchise Tax Board does collect an annual fee for any corporation operating in the state regardless of profit or loss.

"C" Corporation
A "C" Corporation is what is typically considered a "regular" corporation. All publicly traded corporations must be "C" type corporations. Many privately held corporations are also classified as "C" corporations.

A "C" corporation files a "C Corporation" tax return (1120 federal form) and is liable for taxes on any profit showing. Stockholders realize their profit through dividends if the corporation pays them. Stockholders can also realize profits through the purchasing and selling of the corporation stock, although this is not a direct function of the profit of the company.

Limited Liability Corporation (LLC)
This is a new type of entity only being around for the last few years. This corporation has all the benefits of a corporation – the distinct entity separation that a corporation affords, plus the benefits of a partnership in that the profits or losses are passed through to the individual members of the LLC.

The LLC files a tax return, which allocates profits, and losses to the members via a form K1 like a partnership. There is no Federal income tax liability. The State of California Franchise Tax Board does collect an annual fee for any corporation operating in the state regardless of profit or loss.

Trust
A Trust is a fiduciary relationship. Fiduciary is a person, company or association that holds assets in trust for a beneficiary. The fiduciary or trustee is charged with the responsibility of managing the trust assets in accordance with the purposes and instructions set down in the trust agreement. The responsibilities are much the same as the executor of a will.

There are a few different types of trusts each having a specific nature designed to hold or manage assets for a beneficiary. Trusts generally have the benefit of being able to protect assets and are a separate entity from those who granted them or from the beneficiaries.

A trust files a tax return (form 1041) and is liable for any taxes resulting from profits generated by the trust.

If you would like more information on trusts and what they can be used for give us a call, we can provide some useful information and resources.


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