Business Types Defined

Sole proprietorship

A business owned by one person who owns all of the assets and profits associated with the business. Sole proprietors assume all responsibility and liability for any debts or liabilities incurred. Most small businesses start out as a sole proprietorship.

Partnership

Similar to a sole proprietorship with the exception that ownership is shared among more than one person. With no distinction between the company and its owners, all company profits and losses flow directly to partners' personal tax returns. Partnerships may be contingent upon all partners' continued involvement. Some existing partnerships may dissolve or cease to function in the event of a partner's death or withdrawal from the partnership.

Corporation

An organization granted a charter, usually from its state, that is considered a separate legal entity from its owners. Corporations are owned by a group of people called shareholders and generally require more time and money to operate than other business types because they are monitored at both a federal and state level.

Limited Liability Company

LLCs are hybrid companies that are not recognized for federal tax purposes, meaning that they must be filed as a sole proprietorship, partnership or corporation. Owners are called members, and members may include individuals, corporations, foreign entities or other LLCs. LLCs enjoy the benefits of limited liability associated with corporations, but they also provide the management flexibility and potential pass-through taxation associated with a partnership.