Tuscarawas County Auditor’s Office
New Business Guide
Types of Business Entities
TYPES OF BUSINESS ENTITIES
Probably one of the most confusing yet important decisions you will need to answer is the question, “What form of business entity do I want to be?”. This is a question that is imperative to answer because it will effect not only the returns you file but also the way in which you are taxed. The following should acquaint you with the types of entities and some of the advantages and disadvantages:
- Sole Proprietorships – This is the most common form of business. It is an entity where an individual simply runs a business and reports his/her income on their personal income tax return. The revenue and expenses of the business are reported on Federal Schedule C. It is administratively the easiest to run, but carries unlimited liability to the owner, extending to their personal assets.
- Partnership – Partnerships are a form of business whereby there are two owners in business, and generally, the partners have unlimited liability to their personal assets. Partnerships file informational returns only (Federal Form 1065), as their income/loss is reported on the partners individual tax return. The partnership is only taxed at the partnership level when filing with municipalities.
- “C” Corporations – These types of entities are common in business because they allow a number of shareholders to own them and limit liability to shareholders to only what they invest in the corporation. However, “C” corporations can sometimes require a higher level of bookkeeping and record retention and they must be incorporated with the state. “C” corporations are taxed at the corporate level and pay taxes on their profit and loss (Federal Form 1120, State Form FT-1120, and City).
- “S” Corporations – Referred to as a small business corporation, the “S” corporation tries to combine the advantages of limited liability to shareholders with the advantages of a partnership, with less paperwork, etc. There are a maximum of 35 shareholders allowed. “S” corporations file informational returns only (Federal Form 1120S, FT-1120S), as their income or loss is generally reported on the shareholder=s individual tax returns. The “S” corporation is generally only taxed at the corporate level when filing with municipalities, or at the state level when out of state shareholders own a portion of the outstanding stock, or shares of ownership.
- LLC’s or Limited Liability Companies – These entities are designed to offer liability protection to partners in the LLC but retain the advantages of a partnership. Most of these entities are taxed similar to a partnership, but each individual LLC can be different. Many professionals, such as architects, accountants and lawyers have moved to this type of entity as it often provides liability protection to a partner when another partner is negligent. The entity is normally treated for tax filing purposes as a partnership.
A Special Note about Retirement Options – One of the biggest issues needing addressed when choosing a form of entity is the type of retirement plan(s) the entity seeks to have in place, either now or in the future. Certain types of retirement plans are limited to certain entity types, and this discussion is far too in depth to explain in this Guide. We suggest you contact a tax advisor or retirement expert in regards to these issues and entity types.
This List is Non-Inclusive. Seek the assistance of a business advisor.