Certified Public Account in Melville, NY
Adam Greene Discusses Common Business Entities
October 2, 2011Posted by on
About the Author: As a Partner at Melville, New York’s Greene & Company, LLP, Adam Greene works with many business clients, providing a full range of accounting and financial services, from tax preparation to the formation of business entities. A graduate of Hofstra University, he maintains his status as a Certified Public Accountant (CPA).
Several different varieties of business entities exist, including partnerships, corporations, and limited liability companies (LLCs). The term “partnership” incorporates a variety of different schemes. In a sole partnership, a single owner has control over the business, which he or she manages for personal benefit. A general partnership involves two or more owners, each of whom holds responsibility for the debts and liabilities of the company in proportion to his or her stake in the company.
In a similar way, all owners share in the company’s profits. The income of each partner remains subject to tax, but not the income of the actual company. A limited partnership joins both general and limited members. A limited partner has responsibility for the company’s debts and liabilities, but only up to the amount that they contributed to the partnership’s capital.
In a limited partnership, members are not considered liable for losses caused by the improper actions of other members, officers, or agents. Through this scheme, the personal assets of those in a limited partnership have more protections than in a general partnership. The United States recognizes C-corporations and S-corporations in addition to nonprofits. Most corporations fall under the C-corporation heading, as this entity suits businesses of virtually any size. An unlimited number of shareholders may invest in the company, and their assets remain protected from the company’s creditors.
Shareholders have liability only for the amount they invested in the company. Unfortunately, C-corporations suffer from a type of double taxation, since both the profits of the corporation and the income of the shareholders are taxed. Smaller corporations may want to consider applying for S-corporation status, which makes the corporation more like a partnership in terms of taxation. S-corporations avoid the double taxation problem, but they may not have more than 75 shareholders.
Nonprofits, which include companies associated with education, charity, or scientific research, do not have to pay taxes on income as long as they funnel profits to corporate activity. LLCs allow members to avoid exposing their personal assets to company risk and benefit from single taxation, which occurs on the member level. In an LLC, members may flexibly divide profits and losses among the group, unlike S-corporations. In an S-corporation, members divide profits and losses in proportion to the shares held by each individual.
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