The type of business structure defines many things about a company in Indiana. The IRS lists five main business forms: sole proprietorship, partnership, corporation, S corporation and limited liability company.
One of the major factors determined by these structures is how the entity will pay taxes, and how much it will pay, but there are other significant differences, too. The U.S. Small Business Administration explains that these include paperwork, capital and liability, among others.
1. Sole Proprietorship
A person who does business without registering as another kind of business is automatically the owner of a sole proprietorship. Capital may be raised through bank loans, personal loans or lines of credit, but the sole proprietorship cannot sell stock. The owner is personally liable for any of the company’s debts or obligations because basically, the owner is the business. The owner pays personal income tax on the profits from the business.
The IRS also requires owners of partnerships to file personal income tax forms for their business profits. Partnerships typically involve a formal written agreement between all the parties who will co-own the business. They may have varying amounts of liability and control depending on the terms of the agreement and whether the entity is a limited liability partnership or a limited partnership.
Corporations are entities separate from their owners. Starting a corporation is much more complex, with startup costs and paperwork far exceeding other business types. Corporations can raise capital by selling stock. Owners are taxed separately from the business, and they have little to no personal liability.
4. S corporation
Owners pay taxes on their share of S corporations, too, but the corporation itself does not pay taxes. However, the startup process of S corporations is still complex and costly, and they have some limitations regarding shareholders.
Owners of LLCs pay self-employment tax, but the company does not pay taxes. The owners’ personal liability is protected through this business structure, and it is much less complex to start than a corporation.