You may work for a company or own your own, but however you do business, it’s done through some sort of business entity. If you work for someone else, you may not be all that concerned with what type of entity it is. But if you ever plan on owning your own company or running a side business even, you’ll want to be aware of the different entity options available to you. I’ll go over some of the main ones here.

The Sole Proprietorship

This is the simplest form of organization and the most prevalent. It represents a single-person ownership where the person essentially does business in his or her own name. It’s a very popular entity because there are no legal formalities involved for forming or dissolving a business. It offers simplicity of decision making (since there’s only one owner) and low organizational and operating costs. The major drawback of the sole proprietorship is that there is unlimited liability to the owner. In the event of unsettled debts or a lawsuit, the personal assets of the owner are not protected.

As a sole proprietorship, any profits (or losses) are taxed on the owners personal income tax filings. The income and deductions are reported on the Schedule C of the personal return. This makes the accounting of the business much simpler. It’s also important to note that many sole proprietors will register a DBA, or Doing Business As which allows the owner to operate under a name other than their own as well as open a business account with financial institutions.

The Partnership

This form of ownership is very similar to the sole proprietorship except that there are two or more owners. Most partnerships are formed by an agreement between the participants known as the articles of partnership. This type of entity also carries unlimited liability to the owners, however, it could present problems for owners with unequal personal wealth having to absorb the losses. A limited partnership can be utilized to get around the unlimited liability with general partners and limited partners though if you choose.

The tax situation for a partnership is also very similar to the sole proprietorship. Any profits and losses are passed through to the individuals personal tax returns. This again helps to keep the accounting of income and expenses relatively simple.

The Limited Liability Company (LLC)

This type of entity is a legal form of business that offers limited liability to its owners. This means that the owners liability is limited to the amount of their initial and subsequent investments in the company. It’s similar to a corporation, but is usually utilized by smaller companies with a limited number of owners. A sole proprietor my choose to eventually form an LLC, but it would still be treated as a sole proprietorship for income tax reporting purposes. An LLC with multiple owners/members, however, may choose to be treated as a partnership, C corporation, or S corporation for federal taxing purposes.

The Corporation

A corporation is the more complicated of the various business structures. It is a separate legal entity, or Juristic Person. Aside from providing limited liability to the owners, it also has other legal rights and obligations. For tax purposes, this type of entity files its own separate return. The distributions to the shareholders can then also be taxed on personal returns (think of dividends) making it possible for what’s typically called double taxation.

Under certain circumstances, a corporation may elect to be taxed under Sub-chapter S of Chapter 1 of the Internal Revenue Code. These are what are referred to as S corporations or an S-corp. In this instance, income or losses are passed through to the shareholders and taxed only once on personal returns. Certain qualifications, however, must be met for this status.

This isn’t intended to be an exhaustive and detailed list, but hopefully it has been helpful in explaining some of the main differences between these various business entities.

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