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Home  ::  Incorporating in the U.S.A.  ::  Forms of business entities Forms of business entities While there are many different forms of business entities, there are four main types in the United States: Sole Proprietorship General Partnership Limited Liability Company Business Corporation Sole Proprietorhips are the simplest form of business type. They are inexpensive to form, easy to dissolve and generally have no tax aspects, since profits and losses of the business are simply part of the owner's personal income and the company is disregarded for tax purposes. However, since legally the company is nothing more than an individual using a trade name, there is no limit to the owner's liability for the company's obligations. There are virtually no formalities to be observed by the company beyond basic bookkeeping. On the death of the owner, the company immediately ceases to exist. Partnerships are also relatively inexpensive to form, and can be as simple or complex in structure and administration as the partners want it to be. Partnerships are formed by two or more persons (persons being people, corporations, other partnerships, LLC's, trusts or others) who make an agreement to share profits and losses. General partnerships are not incorporated entities, and therefore each partner has what is called joint and several liability to the partnership. In plain English, this means any particular partner can be made to pay the entire debts of the partnership, regardless of the allocation of profits and losses, or capital contributions made into the partnership. Taxation is more complex, but the partnership itself pays no taxes; it is only required to file an informational return to the government to report what the profits and losses of the partnership were and how these were allocated to the partners. A partnership ceases to exist when certain criteria are met, such as the death or bankruptcy of a partner; or if they decide to end the partnership. Corporations are more complex than partnerships or sole proprietorships, in that a new legal person is created. A corporation is an entity that is separate from its owners, so that regardless of what happens to shareholders, the corporation continues until it is legally dissolved. Depending on state law, a corporation can be owned by just one person and have just one director and officer. The owner(s) of a corporation are known as shareholders. The shareholders elect directors to set the policies of the corporation and represent their interests. The directors appoint the officers of the corporation to manage day to day operations. Corporations are legally required to follow more formalties than any of the other entities, including annual meetings of the shareholders and directors, as well as board approval of most significant acts by the corporation. Because a corporation is separate from its shareholders, for example, even if one person is the sole shareholder/director/officer, that person cannot just take company funds for him/herself without documenting the reason and entering a board resolution into the corporate records. Taxation of corporations is much more complex than sole proprietorships or partnerships: depending on the number of, residency of and type of shareholders, a corporation can elect to be treated for tax purposes as a if it were a partnership (an S corporation) and therefore not pay taxes itself, or it can be treated as a taxable entity (a C corporation). Limited Liability Companies (LLC's) are a hybrid of corporations and partnerships, combining the features of both. LLC's are extremely flexible, and can be used for a very wide range of businesses. The members (equivalent to shareholders or partners) can, but need not, have limited liability; can, but need not have, managers (equivalent to directors and officers) and can elect to be taxed either as corporations, or as partners (if they have two or more members) or be disregarded for tax purposes like a sole proprietorship. Like partnerships, LLC's can be as simple or complex as the members desire. Depending on state law, an LLC can have the same limited liability for members as a corporation, or have some members with limited liability and some without limited liability (like a limited partnership), or even have no limited liability for any members (like a general partnership). Unlike corporations, some States require that their LLC's designate a date in the future at which the LLC will automatically dissolve. Some States also require that if a member dies, goes bankrupt or meets some other calamity the remaining members of the company must either dissolve or vote to continue.

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