Business Formation – Types of Companies

What does the word “Business” mean to you? For many, being involved in business means making money. Businesses are defined as an entity or organized entity typically engaged in commercial, organizational, or professional activity intended to earn a profit. Businesses may be nonprofit entities or for-profit ones that operate with the purpose of fulfilling a social objective or furthering a social cause.

Under U.S. tax law, businesses are subject to taxation. The Internal Revenue Code includes twelve categories of businesses: partnership for profit, C corporation, S corporation, limited liability company, partnership for share, cooperatively maintained corporation, and proprietary institution. Business owners can choose any one of these types for their income. Examples of some common types of businesses are partnerships, corporations, partnerships, limited liability company, partnership for profit, and sole proprietorship. Business owners use a variety of strategies to reduce their tax liabilities. Some of the ways they do this are by using a portion of their assets, combining certain transactions into one transaction, taking advantage of tax laws that provide for an option to carry on business unincorporated, paying personal taxes only when income is earned, and passing on personal assets to an estate.

The business definition is relatively simple. It states that a business is a separate legal entity from its owners, which is where the similarities end. For example, a partnership is a legally separate entity from the members of the partnership. Partnerships may also form in bodies of people such as LLCs (limited liability companies), S corporations, and corporations. A business will only be considered as such if it is legally separate from all of its owners.

Many small businesses are formed as sole proprietors. These businesses are treated as such for tax purposes and are allowed to pass their personal assets, such as their salaries, out to other partners so that they remain liable for their own personal debts. The only problem with a sole proprietorship is that, if the business should fail, the owner would still be personally liable for all of the business assets. This is why business entities are often used instead.

Businesses, however, can be run more efficiently by using partnerships instead of sole proprietorships. A partnership consists of many different individuals or businesses operating together. Each one has a board of directors to make business decisions for the other. There are many types of partnerships including limited liability partnerships (LLPs), public limited liability partnerships (PLLs) and public limited partnership (PHPs).

Private corporations are different than sole proprietorships in a few ways. First of all, a corporation is a separate entity from its owners. Another way in which they differ is that the profits from a corporation are only taxed once. Business profits are always taxed once because there is a double taxation owed. This means that double taxation lowers the amount of profit a business actually makes.


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