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What are the three categories of business entities? List and briefly describe the two primary differences...

  1. What are the three categories of business entities?
  2. List and briefly describe the two primary differences between the three categories of business entities.

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Expert Solution

(a) Three categories of business entities

Common types of business entities or corporations includes Sole Proprietorships, Partnership, C Corporation, S Corporation and Limited Liability companies (LLC). Three common business entities in the US are discussed here below:

1) C Corporation : A C Corporation is the most common business entity for large companies. It is a separate taxpayer, with incomes and expenses are taxed to the corporation not owners. Corporations are subject to double taxation. Due to this tax feature, many small business entities do not opt for C Corporation.

2) S Corporation : In S corporation, profits and losses flow through owners rather than being separately taxed in the corporation. They combine the tax benefits of a partnership with liability protection of a corporation.

3) Limited Liability Companies : LLC is special entity which provide limited liability to its owners and transferability of interests. It gives you personal liability protection. It has features of both partnership and corporate entities.

(b) Primary differences between the three categories of business entities:

C Corporation S Corporation Limited Liability Corporations

1) Double taxation: C corporation is taxed separately from its owner which leads to double taxation because first they are taxed to the corporation and then after distributed as dividends among shareholders, taxed again.

1) As a partnership: S corporation is taxed similarly as a partnership. profits and losses flow through owners rather than being separately taxed in the corporation. 1) Tax attributes of partnership : LLC is similar to an S corporation with income and expenses reported on your personal tax return.
2) Unrestricted ownership : C corporation are the best choice for large companies, since the ownership is unrestricted, 2) Restricted ownership: S corporations are restricted to no more than 100 shareholders. 2) No ownership restriction: LLC's have no ownership restrictions and members of an LLC may be non-US citizens.

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