A business is defined by the Internal Revenue Service as a corporation, partnership, limited liability company, partnership, or association. Businesses may be either for-profit or non-profitable organizations that carry out a social cause or further a particular charitable purpose. To establish a business, the U.S. government requires a certain amount of paperwork and filing fees, as well as paying taxes.

Many small businesses may be operated as sole proprietorships. When a person or partnership owns a business, they are considered the “sole proprietor” and are responsible for their own tax obligations. When forming a limited liability company, or LLC, some limited liability companies form as a corporation and some as a sole proprietorship. Some businesses may use a business structure that combines the two structures, for example a general partnership.

Limited liability companies are most commonly known as LLCs, but there are other names such as partnerships, corporations, and LLCs. The IRS calls these types of business arrangements “incorporations.” An LLC is a separate entity from its owners and allows them to file their own taxes. Unlike partnerships, which are considered partnerships for tax purposes, an LLC is not liable for debts of its owners. One of the major advantages of an LLC is that its shareholders do not have to share equity in the business.

Incorporation provides the partners with a legal set of identity and liability protection. This shield from liability allows them to carry on their business without worrying about lawsuits filed against them by other people or companies. In some cases, an LLC will incorporate as a corporation or sole proprietorship, and all or part of the business can then be owned and operated by the LLC. However, if the LLC would include the business’ home office as its principal place of business, then it would be considered a partnership and all partners would be treated as such. All income tax returns would be consolidated as if the home office were a separate location.

LLCs are also different from corporations, in the way that they can adopt corporate resolutions and provide for board meetings, management and general functions, and have the same rights as a corporation. However, unlike a corporation, the members of an LLC are not entitled to vote or have their contracts considered legally binding. As with a partnership, there is normally no requirement for an annual general meeting of an LLC. Although most LLCs are run profitably, it is still best to keep records of all meetings and maintain minutes of such meetings.

There are differences between an S-corporation and an L-corporation, and between sole proprietorships and LLCs. However, even if the differences are slight, an understanding of the differences is essential for success. Both S-corporations and L-corporations are different entities that have the IRS on their side; however, the differences between the two are more about classification than it is about benefits. Therefore, it is up to you to understand the differences between an S-corporation and an L-corporation and then select the correct tax structure for your business.

By Arlene Huff

Arlene Huff is the founding member of Golden State Online. Before that She was a general assignment reporter. A native Californian, she graduated from the University of California with a degree in medical anthropology and global health. She currently lives in Los Angeles.

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