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Frequently Asked Questions # 20
20. What is the difference between a sole
proprietorship, partnership, corporation, and a
limited liability company? Should I incorporate
my business?
A
sole proprietorship is a business with
one owner. The owner is the business and the
business is the owner. All income and expenses
pass through to, and are filed as part of, the
owner's personal return. If there is a business
loss, the owner will enjoy a deduction to offset
personal (paycheck) income. If the business
makes a profit, the owner is responsible for any
taxes due.
A
partnership is similar to a sole
proprietorship but has two or more owners. The
partnership is not a separate legal entity from
its owners but can hold property and incur debt
in its name. A partner can be held liable for
the acts of the other partners, increasing
personal liability. The partnership must also
file an informational tax return with the IRS.
A
corporation is a separate legal entity.
Incorporating allows a group of entrepreneurs to
act as one, much as the way a partnership does.
It can protect its owners by absorbing the
liability if something goes wrong. For example,
lawsuits can be brought against the company
instead of you personally; debt is incurred in
the company name and you are not personally
liable (unless you provide a personal
guarantee). The owner of a corporation is known
as a shareholder.
The
limited liability company features
pass-through taxation of the partnership, and
limited liability of the corporation. Laws are
still developing on this form of business
organization.
The
ASBDC cannot give legal advice regarding the
various forms of business organization. Contact
an attorney or accountant for detailed
information regarding the type of business
entity best for you. Our research center in
Little Rock has books and handouts ranging from
very basic information to very detailed
information about the different entities.
Refer to:
New Venture Guide, Forms of Business
Organization
Arkansas Secretary of State's Office -
Corporations: Inc's, LLC's, Non-Profit, etc
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