Choose the legal form that fits your goals and create your business today:
Making a profit is a key goal for the overwhelming majority of firms. How a firm’s owners benefit from profits and suffer from losses varies across different legal forms of business. Below we illustrate how profits and losses are treated within different business forms.
- A sole proprietorship is owned by one person. The firm and its owner are treated interchangeably – the owner is the only beneficiary of any profits and is personally responsible for any losses and debts.
- In a partnership, two or more partners jointly own the firm. A successful partnership requires trust because profits and losses are shared and because each partner is accountable for the actions of others.
- A corporation such as separates ownership and management by issuing ownership shares that are publicly traded in stock markets. Shareholders do not directly receive profits or absorb losses, but profits and losses tend to be reflected in whether the firm’s stock price rises Or falls. Shareholders can also benefit from profits in the form of dividends. A disadvantage of this business form is double taxation: taxes are paid on corporate profits and on any dividends that corporate income fuels.
- A Limited Liability Company (LLC) can be thought of as a hybrid of a corporation and a partnership. Like in a corporation, owners are not accountable for the firm’s debts. A winner of a legal judgment against an LLC, for example, cannot claim the personal assets of the LLC’s owners. LLCs also enjoy the management flexibility of partnerships. For federal tax purposes, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship.