A simplified (no pun intended) guide to the types of legal business entities:
An entity is just a catch-all term for all companies, regardless of business type.
For-profit businesses have three basic types: sole proprietor, partnership, and corporation.
Sole proprietor is exactly what it appears to be,
a single person responsible for reporting the net income of the business.
Partnerships are two or more people joining together,
where each partner is responsible for reporting their portion of the net income
and each partner is liable for the actions of every other partner.
Corporations come in two varieties, C corps and S corps.
The "C" and "S" refer to the governmental sub-chapter where the rules are defined.
The C corp is a legal, stand-alone "person" responsible for reporting its net income.
The S corp is a legal, pass-through entity
which means the net income flows proportionately to the shareholders.
If a small business is set up as a corporation, it is probably an S corp.
Sole proprietorships are the easiest to start. No legal paperwork to be filed.
Partnerships and corporations each require legal paperwork
and each has specific bookkeeping requirements as well as tax filing requirements.
For each of the above, there are legal steps you may want to take even if it is not required.
Check your state requirements so your company will be compliant with state law.
Wait! My business isn't any of those! My business is an LLC.
Limited Liability Companies are a recent phenomenon created
to allow an option of "limited liability" for the owner(s).
Every LLC must declare itself one of the three business types for tax reporting purposes.
If you use Schedule C on Form 1040 to report and file your LLC's financial activities,
you are a sole proprietor for tax reporting.
If you use Form 1065 to file, your LLC is a partnership for tax reporting.
If you use Form 1120S to file, your LLC is an S corp for tax reporting.
Selecting a business type is extremely important; get the advice of a professional.
