Sole Proprietorship

• A sole proprietorship is the simplest form of business. It is also the least expensive to set up and operate on a continuing basis. By definition, there is only one owner and all business profit or loss is reported on the owner's personal tax return via Schedule C. Sole proprietors must pay Social Security and Medicare taxes on their net self-employment income. Also, the business is not a separate legal entity from the owner, so the owner is personally liable for all business debts.
  
  

Partnership

• A partnership is a simple and inexpensive business to create and operate. Partnerships, by definition, must have two or more owners. The partners should have an operating agreement and must file a separate partnership tax return. Each partner's share of the business profit or loss flows through to the partner via Schedule K-1 to be reported on the partner's personal tax return. Partners are generally liable for all business debts and must pay Social Security and Medicare taxes on their net self-employment income.
  
  

C Corporation

• A C corporation is a separate legal entity from its owner or owners. A C corporation is more expensive to create and operate than a sole proprietorship or partnership. There is a risk of double taxation since the corporation is a separate taxable entity. Generally, corporations have less risk of government audits than other business forms. Also, owners have limited personal liability from business debts. Owners can deduct fringe benefits as a business expense, and also split profit between the corporation and the owner for a lower overall tax bill.
  
  

S Corporation

• An S corporation is a special corporation that must meet certain eligibility requirements. It shares many of the same advantages and disadvantages of the C corporation with certain exceptions. Business profit or loss flows via Schedule K-1 to each owner for reporting on their personal tax return. Fringe benefits for owners are limited in an S corporation. Owners can save on employment taxes by taking distributions instead of salary. Owner liability is again limited for business debts.
  
  

Limited Liability Company

• Limited liability companies are a newer type of business form that is taxed like a sole proprietorship or partnership but provides limited liability for owners. They are simpler and easier to run than corporations, and can have one or more owners. Owners can elect with the IRS to be taxed as a C or S corporation. This election can ordinarily be changed only after five years. LLCs have become extremely popular in recent years.