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The primary considerations in choosing the type of business entity to form in which to conduct business are protection from personal liability and tax treatment. Generally, the choices available are:
Sole Proprietorship: A sole proprietorship, whether or not conducted under a fictitious business name provides no protection to the owner from personal liability. The liabilities of the enterprise, as well as the risks, are personal to the owner, irrespective of whether the liability arises from the acts of agents or employees of the employees. Income from sole proprietorships is taxed at the owner's individual tax rates whether or not the income is left in the business account.
Partnerships: Generally, there are three types of partnerships: (i) general partnerships; (ii) limited partnerships; and (iii) limited liability partnerships. Two or more persons or entities conducting business together without a written agreement will usually be construed to be a general partnership. In a general partnership each partner is personally liable for his or her own acts as well as for the acts of each of the partners undertaken in furtherance of the partnership. Income taxation in a general partnership flows through to each of the partners usually in proportion to their interests in the partnership. Limited partnerships consist of one or more general partners and one or more limited partners. The personal liability of a general partner in a limited partnership is the same as a partner in a general partnership. The liability of limited partners, however, is limited to the extent of their investment in the limited partnership. Limited partners trade for this additional protection by giving up most rights to participate in the management of the partnership. Income taxation generally flows through a limited partnership to the individual partners and taxed at the partner's tax rate. Limited liability partnerships are similar to limited liability companies, but are limited to professionals for whom a state license is required.
Corporations: There are many different types of corporations. However, for profit corporations provide limitations on shareholder personal liability for conduct undertaken in the furtherance of the corporation's business. Provided the corporation is in good standing and there is no legal basis to disregard the corporate entity, shareholders, officers and directors are not personally liability for the acts of the corporation's agents or employees. Such liability is assumed by the corporation and not directly by the shareholders. However, shareholders, officers and directors remain personally liable for their own conduct. Tax liability of corporations will vary by election. Should the corporation elect to be treated as a "sub-chapter S" corporation, then income from corporate activities flows through to the shareholders and is taxed at the individual shareholder's tax rate. There is no corporate income tax. Should the corporation elect to be treated as a "C" corporation, then corporate income will first be subject to corporate taxation before distribution to the shareholders, and then the distributions will be subject to personal income taxation.
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