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Understand the Differences Between the Entities

Before we discuss the specific tax advantages and disadvantages of the various business entities, it is important that you know some fundamental tax considerations between a:

sole proprietorship,

general partnership,

limited partnership,

corporation, and

limited liability company.

The Sole Proprietorship

The sole proprietorship is thought of as the quickest and easiest way to set up a business operation. There are no blanket prerequisites, nor are there any specific costs in starting a sole proprietorshipNo specific costs in starting a sole proprietorship. There may be some minor formalities, however, that will need attention depending on your state or your jurisdiction. These formalities, which of course apply to all business entities, mean that you will probably have to:

obtain an occupancy permit for your place of business, secure a business license, and apply for a franchise or registration number for your operation. This registration number will be used by the state agency to monitor the collection of sales tax and other regulatory matters.

All of these procedures are simple and can be done without the assistance of an attorney or accountant regardless of the state in which you are doing business. Once you start a sole proprietorship, you are the sole owner. Unless you are in a community property state in which your spouse is vested with a one-half interest, you alone have full control and responsibility for the operation.

The General Partnership

Like the sole proprietorship, starting up the general partnership could be a relatively easy process. No costs or formalities are required. Wise counsel, however, will give you about a dozen reasons why you should have a detailed partnership agreement drafted whenever you put yourself on the line with any other individual. A few items that you would be best advised to spell out in writing are:

the amount of capital each partner is expected to contribute up front; the rights and duties of the partners; the method for sharing profits and losses; the authorization for cash withdrawals and salaries, the methods for resolving disputes or taking in new partners; and the method for dissolving the partnership should dissolution become necessary. Remember, this is often the case.

The Limited Partnership

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