There are six different types of business, or ways of setting up a business, as follows:
1. Sole Proprietorship,
2. General Partnership,
3. Limited Partnership (LP),
4. Limited Liability Company (LLC),
5. C Corporation, and
6. S Corporation.
A sole proprietorship is owned by a single person and the easiest to set up, with little to no cost to set up as a business entity. In the United States, anyone can set up a sole proprietorship and their social security number is what is used to identify the business for tax purposes. Some example businesses that use this type of business structure are; landscaping, construction, consulting services, and web design/development... even a lemonade stand. Typically small businesses use a sole proprietorship. A primary concern with setting up this type of business entity is the individual is exposed to all the risk, unlimited liability; creditors can go after the individual (seeking their personal assets to pay off credit debt), and other legal issues will be the individuals responsibility. There is a cost benefit here, and weighing your alternatives is important. Carfully consider the risks.
A general partnership is a business entity that is set up by two or more people and they agree to sharin the responsibilities of managing assets, profits, financials, and legal liabilities of the business. Similar to a sole proprietorship, the owners of this type of business have unlimited liability, which means they are personally responsible for any legal obligations. Often husband and wife will share this type of business.
A limited partnership is simliar to a general partnership; a general partner manages the day to day operations of the business, and they bear unlimited liability for the business debt, obligations, and legal liabilities. However, what differentiates this type of business from a general partnership is there are limited partners (also referred to as silent partners or silent investors), who make investments in the company. There can be an unlimited number of silent partnerts. These silent partners are a source of capital for the partnership and are only exposed to liabilities associated with their investment in the business. Typically accounting and financial firms, and law offices, use this type of business structure. From a taxation perspective, income is not taxed to the business. Instead, profits and losses are passed through to partners, which gets reported on their personal tax returns.
Limited Liability Company
A limited liabillity company (or LLC) is a hybrid of a partnership or sole proprietorship and a corporation. With this type of business structure the members of the business are not personally held responsible for debts, liabilities, or legal obligations - they members have limited liability. However, similar to a partnership or sole proprietorship, taxation is flowed through to the individuals.
A C Corporation is a business entity that is owned by shareholders. The shareholders elect a board of directors, who in turn are responsible for making business decisions and overseeing the policies that are established for the business. A C Corporation is considered a living entity and does not cease to exist when its' owners die, or shareholders change... in theory a corporation can "live forever." The key benefit of a corporation is the owners and shareholders have limited liability for the business debts and legal obligations. An additional benefit is how these types of business are taxed. For example business expenses, such as medical plans for employees, can be written off as a business expense, so they are tax-free for the company and the individuals that receive the benefit. An additional benefit of a C Corp is corporations typically have a lower rish of being audited by the government.
An S Corporation is similar to a C Corporation, but it must meet specific requirements set forth by the IRS. To meet these requirements a corporation must have 100 or less shareholders, must be domestic, and can only have one class of stock. The benefit of an S Corp is income and taxation is passed directly to shareholders, avoiding double taxation.