A business is defined legally as an entity organized for profit, commercial, or corporate activity for profit or for the benefit of the members of the group. Businesses can be either sole proprietorships, partnership relationships, corporations, limited liability companies, etc. An individual may become a business owner by forming a corporation, limited liability company (LLC), or any other type of business entity commonly known as a corporation. Business owners need not meet any formal accounting or financial business requirements. Forming a corporation is not required by most states in the U.S.
Business corporations are organized in much the same way as sole proprietor corporations, except for the fact that they may carry on business even without having any employees. Business corporations may be operated by one or several stock holders. Stockholders are generally only entitled to vote, and have no rights or privileges upon the business itself. Unlike a sole proprietorship, where the business owner is the sole owner of the company, shareholders are considered joint owners of the corporation. They own a portion (known as the “stock”) of the entire company, just as they would if they owned the entire company. If the corporation is organized as a limited liability company (LLC), there are generally no restrictions on the number of shares of stockholders or, in general, on the amount of dividends they receive.
Business corporations have many advantages over sole proprietor or LLC businesses. First, in the case of malpractice, the liability of the corporation can be enforced against the personal liable to bring damages. Also, in the case of fraud, unless the personal is proved to be a principal or officer of the corporation at the time of the fraud, the assets of the corporation are protected from a suit by any individual who might be its victim.
Another advantage of corporations is that they are able to deduct the costs of doing business. This is a tremendous benefit that most small businesses do not have. A sole proprietor cannot deduct his expenses against his personal income, which makes borrowing money very difficult, if not impossible. A corporation is never taxed on its profits, although some states, such as Nevada, do have corporate tax for the personal profits of the corporation. However, the corporation is treated as an entity separate from the owners, so any profits it receives are taxed as if they were earned by an individual.
Limited liability companies (LLCs) are a newer concept that are designed to provide protection for the business structure from personal liability. In an LLC, all of the members are treated as single entities. They are allowed to use their personal assets for the LLC’s profits, and only are required to pay taxes on the profits of the LLC. Although the corporate tax structure is somewhat similar to sole proprietorships, both types of business structures offer unique advantages and disadvantages.
The most common example of an LLC is a limited liability company. An LLC is a great business concept that has been especially designed to protect small businesses from personal lawsuits that may occur. It is also beneficial for investors because it offers a sort of pass-through taxation. This means that the profit of the business can be passed along to the investor and not be taxed on the profits. Because there are so many advantages of an LLC, it is easy to see why it is the most popular form of business ownership.
The second most common type of business concept is a corporation. A corporation is simply a separate legal entity from its owners. Corporations may be operated in any state, but most operate in the same manner as sole proprietorships: they issue shares to stockholders, and they report their profits and losses on their tax return to the IRS.
There are benefits to owning either a corporation or a sole proprietorship. Corporations offer some advantages over sole proprietorship, especially in the area of limited liability. A corporation is often established by the same person that created it (or by a third party). This creates a “series of owners”, or corporation with one owner. Also, the corporate veil allows shareholders to “pass” laws that directly affect their company.