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A sole proprietor is one individual who owns a company that is not incorporated or registered with the state as a limited liability company (LLC). Sole proprietors may or may not have employees.
In a sole proprietorship:
•The business does not exist separately from the owner.
•The risks of business apply to the individual's personal assets, including those not used for the business.
•The sole proprietor reports business income on his or her individual tax return.
A corporation is a legal entity established by a charter granting it certain legal powers, rights, privileges, and liabilities. A corporation can be established by a person or group of people with a charter from the state's secretary of state. After a corporation is created, it becomes its own entity and generally has an indefinite lifespan.
An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants.
Partners can be individuals, corporations, trusts, estates, and other partnerships.
Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership does not pay tax on its income, but "passes through" any profits or losses to its partners. Partners must include partnership items on their tax returns.
Two common forms of partnerships are general partnership and limited partnership.
A limited liability company (LLC) is a structure allowed by state statute. An LLC is formed by filing articles of organization with the individual state's secretary of state. Owners of an LLC are called members. Members may include individuals, corporations, other LLCs, and foreign entities. An LLC can be formed by one or more members, and there is no maximum number of members.
There can be no more than one active LLC with the same name in the same state.
For federal tax purposes, an LLC may be treated as a partnership or a corporation, or be disregarded as an entity separate from its owner.
An LLC can also be organized as a professional limited liability company (PLLC) or a limited company (LC).
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
To qualify for S corporation status, the corporation must meet the following requirements:
•Be a domestic corporation
•Have only allowable shareholders
including individuals, certain trust, and estates and
may not include partnerships, corporations or non-resident alien shareholders
•Have no more than 100 shareholders
•Have one class of stock
•Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
Non-profit organizations include corporations, trusts, limited liability companies, and unincorporated associations that qualify for tax-exempt status under Internal Revenue Code (IRC) 501(a) as described in Publication 557 (Tax-Exempt Status for Your Organization).
Non-profit organizations include: public charities, private foundations, educational organizations, employee associations, veteran's organizations, business leagues, state-chartered credit unions, child care organizations, and teachers' retirement fund associations. This list is not all-inclusive.
Sole proprietors and partnerships cannot be considered for tax-exempt status. For-profit organizations cannot be considered for tax-exempt status.
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