Question

• What are at least four common types of legal entities that business owners or board of directors can choose for their organization?
• Describe the major attributes of each and their major federal tax benefits.
• Which one would you select as a business owner for tax purposes? Why?

Answer 1

The most common type of Legal Entities for Business owners or Board of Directors are
1. Sole Proprietor run by single individual
2. Partnership Firms run by a group of person or entities
3. S-corporation or Small Business Corporation
4. Limited Liability Partnership(LLP) Firms
5. C-corporation

1. Sole Proprietor
Attributes
- It can be started quickly and closed/wound up quickly.
- Business decisions can be done quickly by the Sole Proprietory
- There is lot of flexibility in running the business.
- The profits and losses of the business are profits and losses of the individual running the business.
- Similiarly the Assets and Liabilities of the Business including Taxes are the Assets and Liabilities of the individual

2. Partnership Firms
Attributes
- It is formed by two or more individual and/or entities.
- There can be one or more persons responsible for running the entity.
- In case of unlimited liability firms, partner become individually liable for the liabilities of the firm.

  
3. S-Corporations
Attributes
- This type of entities dont have to pay corporation tax. The Owner/Shareholder are responsible for the tax liabilites
- It has benefits of both Sole proprietor and C-Corporation.
- However, it may have to follow some of the compliance and regulation related to Partnership or C-corporations

4. Limited Liabilities Partnership (LLP)
Attributes
- The Partner have limited liabilities similiar to shareholder of Corporations. They are not personally liable for the liabilites of the firms.
- US tax laws allow the partners to decide whether the LLP will be taxed or treated as Pass though

5. C-Corporations
Attributes
- It has a seperate/distinct legal entities from its owner/shareholders
- They have to follow/fulfill the regulations laid down by their regulators
- These type of entities can easily raise capital. /finances
- It are eligible for multiple tax benefits

If tax saving is the criteria, then a person should form their business as C-Corporation to reduce their tax liabilites.