A partnership is similar to a sole proprietorship, only the ownership is divided between two or more people. They each contribute financial resources, property, labor, skill, and they share all of the losses and profits that come with the business venture.

The partnerships file and annual return of income to report the finances of the business but each partner is responsible for handling taxes for their respective share of income or loss.

The business must be registered with the state and file appropriate licenses, permits, and regulations. There are 3 types of partnerships:

General partnerships divide profits, liability, and management duties equally.

Limited partnerships grant limited liability and input to partners dependent on that partners investment.

Joint ventures act as a general partnership for a limited time.

Partnerships are simple and inexpensive to form, there is an ease of capital acquisition due to shared financial commitment, and each partner contributes a unique skills set. However, you are not only personally liable for actions, debts, and obligations of the business but also the other partners. Personal disagreements can also occur between partners and the profit and success is shared between the partners even is some aren’t pulling their weight.

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This is the simplest way of structuring your business to protect personal assets. The LLC or Limited Liability Company is the newest form of business incorporation, and is often described as a combination of a corporation and a partnership. Over 80% of small businesses are LLCs, and for many good reasons. With less requirements and more flexible ownership options than the other entities, LLCs provide business owners with limited liability protection. This means that the company assets are typically owned by the LLC and are separate from the personal assets from that of the LLC owners.

This is a great option for those who want to minimize risk when starting their business along with more management flexibility and less complex tax filings. If you happen to go into debt, your personal assets are protected and won’t be used to pay for outstanding business expenses. Additionally, your net income or loss is “passed through” to the personal income of the owner or member, and is simply taxed as personal income for state tax returns and federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single-member LLC). LLCs can have one owner or be a partnership, can be owned by non-US citizens, and involve fewer management requirements than an S Corp or C Corp.

Under partnership tax treatment, each member of the LLC reports income or loss on his or her individual income tax return. However, an LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832.

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An S corporation is a special type of corporation that draws its designation from Subsection S of the tax code. To start an S corporation, a small business owner starts a C corporation, then files a Form 2553.

S-Corps do have more operating requirements and ownership restrictions than an LLC, but they also have significant advantages. One advantage of the S Corporation is that like the LLC it receives pass-through taxation.

Pass through taxation simply means that federal income tax is not assessed at the entity level; profits are distributed in the form of dividends and flow through to the individual tax returns of the shareholders, and the IRS taxes the shareholders at their individual income tax rate and not at the entity or corporation level. Unlike an LLC, Forming an S Corporation can give you the ability to minimize payroll and self-employment taxes, resulting in significant savings in certain situations. The company is separate from the shareholders, allowing them to sell shares without impacting the business.

But, an S Corporation has a stricter operational process, shareholders must be paid fair market value compensation, there cannot be more than 100 shareholders, and foreign ownership is prohibited.

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A C corporation, or C-Corp often just called a generic corporation is the oldest and one of the most common business entities. A C corporation is a completely separate tax and legal entity from its owners. The business itself is legally liable for actions and debts rather than the shareholders.

When you look at all of the requirements placed on C corporations, you might wonder why anyone would form one. The C-Corp does offer several unique benefits. While all business entities can provide fringe benefits to its owners and/or employees, the Corporation allows for a greater range of fringe benefits. Forming a C-Corp is also advantageous to corporate tax treatment and income splitting. The tax rate on corporate income is usually lower than the tax rate on personal income up to the first $75,000 in income. The owners can arrange salaries and bonuses in conjunction with retained corporate earnings to lower their overall tax rate.

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This is an organization to give back and is eligible for tax breaks. A Non Profit corporation is a corporation whose principal purpose is public benefit. It provides a shield against potential liability for its directors, officers and employees. If classified correctly with the IRS, nonprofits are exempt from federal, sales, and property taxes.

Despite this entity’s name, a Non Profit Corporation may generate a profit. Non Profit does not literally mean that your corporation cannot make a profit. A Non Profit Corporation can acquire more income than it spends on its exempt purpose. This profit can be utilized for operating expenses, including salaries. However, a Nonprofit Corporation may not utilize its income to profit any director or officer.