There are many types of business organizations under state law. The federal Internal Revenue Code affects tax consequences for each type of organization. Some of these organizations, and their tax consequences and their liabilities, are:
As sole proprietor is simply a person doing business as himself. He has no partners. He might be using a trade name, which is registered with the county or state.
Whatever money a sole proprietor makes is taxed to him. If the sole proprietor makes charitable contributions, he might be able to deduct those contributions from his federal tax return.
A sole proprietor is personally liable should he be sued for his business activities.
A partnership is a group of two or more persons or other business entities that join together to do business.
For tax purposes, partnerships are not considered separate from their partners. Partnerships are “pass-through” entities. Partnership profits and losses “pass through” to the partners who are taxed individually.
A limited partnership usually consists of a general partner and one or more limited partners. The general partner runs the limited partnership. The limited partners are “silent partners” in that they invest in the general partnership but do not run it.
Limited partners generally are not liable for the business activities of the limited partnership, although the investments they have made in the limited partnership are considered partnership property and are liable.
A corporation is a business entity that is organized by a filing with the state. A corporation has officers, shareholders and directors. The shareholders elect the directors who in turn appoint the officers. Corporate affairs are conducted in accordance with the Certificate of Formation and the corporation’s bylaws.
A corporation can be a “C” corporation or an “S” corporation. In the former, the corporation’s income is taxed at the corporate rate. Any dividend income to the shareholders is taxed to them. In the latter, all income is passed through to the shareholders who pay taxes on it.
A corporation may opt to be a non-profit corporation. In that event, the corporation must apply to the Internal Revenue Service for approval as a non-profit. Corporate profits must be used for corporate purposes rather than distributed to shareholders. Contributions to a non-profit are usually tax-deductible to the contributors.
Corporations are liable for any business activity by them. So long as the corporate form is used, individual shareholders will not be liable for corporate acts unless they are officers and directors and are sued in those capacities.
Limited Liability Companies
Limited liability companies are similar to corporations except that the shareholders are called Members and those in charge are called Managers. As with corporations, a limited liability company comes into existence by filing a Certificate of Formation with the state. Limited liability companies are governed by the Certificates of Formation and Operating Agreements among the Members and Managers.