Types of Businesses: Partnerships and S Corporations

Starting your own business can be a very exciting decision, but it is important to consider the legal ramifications of this decision. There are a number of types of businesses, with the sole proprietorship, being one of the more common types. Partnerships are another common type of business and include any business that is started with one or more other individuals.

There are actually two types of partnerships, specifically limited partnerships and general partnerships.

Difference Between General Partnerships and Limited Partnerships

In a general partnership, the assets, both business and personal, of all partners can be sought if there is a lawsuit or other incurred debt.

In a limited partnership, the assets of the general partnerships are up for grabs if there is a dispute, but the liability of limited partners is restricted to their investment or stake in the company.

Types of Partnerships

Like a sole proprietorship, it is possible to begin a partnership in a very informal matter or to have a set contract and agreement prepared. Generally, when agreements are in place, they will cover things like how income, loss, expenses, and general responsibility will be doled out among the partners. If it is a limited partnership, some type of agreement is required, however, as otherwise it will be treated as a general partnership.

Forming a LLC Partnership

A Limited Liability Company, or LLC, is a way of reducing risk when starting a businesses and generally means that only business related assets are at risk. In order to start a LLC, there is some paperwork that must be completed that defines the business and is generally rather inexpensive to set up. LLPs are available in some states are are classified as Limited Liability Partnerships, which offer the same sort of protection that a LLC wold offer.

Tax Concerns when Creating a Partnership or LLP

When creating a partnership or LLP, most of the taxes and income are passed on to the actual owners, with each partner reporting their income and loss on their personal tax return. The amount that is passed through to the personal tax return is dictated by the type of partnership and the terms set out in the partnership agreement, so that one partner will not claim all of the expenses or income.

S Corporations

When starting your own business, often one of the most important concerns is how liability issues will be addressed. For example, in a standard sole proprietorship, both personal and business assets could be at risk. However, if a Limited Liability Company is formed, the risk can usually be reduced to only business assets. There are a few options for mediating risk when more than one person is involved, with the S Corporation being one option.

S Corporations are created as business entities that are separate from their actual owner. What this means is that the owner could die or leave the company, but the S Corporation will continue to exist.

Tax Concerns when Creating an S Corporation

In terms of the IRS and how income is handled, they are usually classified in the same way as a Limited Liability Company would be, in that the income or losses are passed through to the individuals personal tax return. Generally each member of the S Corporation is classified as a Share Holder.

In order to qualify as an S Corporation, the company must submit IRS Form 2553, which states that the decision to become an S Corporation was voted on by the members.

While in most cases, in terms of taxes, an S Corporation is treated as a pass-through-entity, where profits and losses are expressed on each members individual tax return, it is also possible to set the corporation up as its own taxable entity. The income that is claimed by an S Corporation can only be built-in gains, LIFO recapture, or passive investment income.

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