As the name suggests, a sole proprietorship is an unincorporated business that has a single owner. It is the easiest type of business to form because the only paperwork filed is a fictitious name statement with the county clerk. The drawbacks are that the owner must report the business’s income or loss on his or her own taxes, and the owner is liable for the business’s debts and other legal liabilities. Similarly, the assets of the business can be seized to satisfy the owner’s personal liabilities. LLCs and corporations offer more protection against liability, both for the business and for the owner.
Partnerships are similar to sole proprietorships in many aspects, but they have more than one owner. Typically, no paperwork needs to be filed with the government to form a partnership, but partners will usually want to draft a written agreement to lay out the structure of the business and the partners’ rights and duties with respect to each other. When preparing the partnership agreement, it is vital that the partners consider and decide how to deal with such potential issues as distributing profits and debts, resolving disagreements between them, and continuing the business if a partner dies or leaves the partnership.
The law treats corporations as separate entities from the individuals who own the corporation, called stockholders or shareholders. The biggest advantage of operating a business in the form of a corporation is that owners are generally protected from personal responsibility for the corporation’s liabilities. Each state has a set of statutory law governing corporation formation, governance, conducting business in the state, maintaining local presence and termination. A corporation may elect to be treated as a tax pass through structure thus avoiding double taxes in many instances.
The limited liability company (LLC) affords business owners the most important advantages of both corporations and unincorporated businesses: protection from liability together with flexibility and relatively little regulation. The LLC is considered a separate entity from its owners, called “members,” so, like corporations, the members are generally not personally liable for any of the company’s debts or torts. One advantage that LLCs have over general corporations is that they avoid the problem of double taxation. The owners report profits and losses of the LLC on their personal tax returns, as do owners of unincorporated businesses. LLCs do not pay federal income taxes, but some states charge their own taxes on LLCs.