A business is defined by Wikipedia as a corporation or organized business undertaking, usually involving trading or exchange of financial assets. A business is different from a sole proprietorship in that the latter retains the power in managing and exercising the powers of the owner but does not carry out the obligations and responsibilities of the proprietor. A business is different from a partnership in that the liability of the business entity is shared by more than one partner. Business can also be separated into distinct categories, such as service businesses, financial businesses, manufacturing businesses, and intellectual properties businesses. There are many aspects that govern the formation and conducting of a business.
All corporations and partnerships are subjected to the taxation laws of the country in which they operate. The major differences between these two types of legal formations are their use of shares, voting rights, and privileges and the extent to which the partners will control and be able to manipulate the company. Both a partnership and a corporation have their own tax purposes, and both also have other related requirements. It should be noted that although a partnership may incorporate itself as a pass-through entity, all of its income is taxable to the extent of its profits, while a corporation only receives the dividends it receives from its shareholders.
There are two basic types of business structures. One of them is a partnership, in which the partnership is regarded as a separate legal entity from its participants. Partnerships have advantages for tax purposes: they allow business owners to divide their profits among themselves as they see fit, they do not need to file joint income tax returns, and they generally do not have to pay corporate taxes. However, there are several disadvantages to corporations.
First, unlike partnerships, in which the profit of the corporation is distributed among its stakeholders (stockholders), the profits of corporations are generally subject to double taxation. As with partnerships, corporations have to pay the corporate tax on their profits, as well as on the dividends of its shareholders. In addition, corporations are subjected to certain payroll taxes, like a partnership’s income tax. The only major advantage that a corporation enjoys over a partnership is its ability to choose its tax exempt status, which is permanent.
A second type of corporation is a C corporation, or a corporation that has limited liability. Unlike a partnership, in which two members are treated as sole proprietors, a C corporation is organized so that one member is considered its principal stockholder. This way, the corporation is treated as a public corporation and is usually granted tax exempt status by the IRS. Because of this tax-exempt status, a corporation is often times able to grant more flexibility to its shareholders than would a partnership.
Limited liability companies are the most popular business types. They are popular because they are relatively simple to establish and operate. They have few requirements on the part of the shareholders, so there is a great deal of room for creativity. However, limited partnerships and corporations require regular reporting to the IRS about the income and assets of the company. These businesses are subjected to the same taxes as other kinds of businesses, such as income, corporate taxes, payroll taxes, and property taxes. A limited partnership also has the advantage of using its corporate assets to guarantee loans, so it does not have to pay interest.