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What are the different business forms?

What are the different business forms?

New business owners may wonder what the different business forms are that they can select from when setting up their new business. There are several different business forms new business owners can consider. This blog previously discussed factors to consider to help make this important decision and business owners should also know the different business types.

Sole proprietorship

A sole proprietorship is the least expensive and simplest business form to start up. Sole proprietorships have one owner and do not provide personal liability protection for the owner from lawsuits or creditor claims. This means that the owner’s personal assets can be used to satisfy a judgment against the business. The income of the business is also reported on the business owner’s personal income tax return.

Partnership

A partnership has two or more owners and is usually operated according to a partnership agreement. The partnership agreement should outline how the profits and losses of the business will be shared. Typically, the partners have unlimited liability for business liabilities and lawsuits against the business or other partners. The profits and losses of the business flow through the personal tax returns of the partners.

Limited liability company (LLC)

An LLC is formed using articles of organization that will need to be filed or a certificate of formation. The members of the LLC, which are the owners, are shielded from personal liability for lawsuits and debts of the business. The members can determine if they want to be taxed as a partnership or as a corporation.

Corporation

A corporation is on the other end of the spectrum from a sole proprietorship and is the most expensive business form to set up. There are many requirements for setting up a corporation and many regulations that govern corporations. The owners of the corporation have personal liability protection. Depending on the type of corporation, the corporation may be double taxed because the owners and the corporation are taxed or only the owners may be taxed.

The selection of a business form is an important decision. Business law can help guide these important decisions.