Types of Corporations and Business Treatments
A business is defined according to the US Internal Revenue Service as a legal entity or organization that carries on commercial, organizational, or personal activities in order to earn a profit. Businesses may be either for-profit or non-for-profit entities that conduct business to meet a social purpose or further a particular social cause. In order to understand your tax responsibilities as a business owner, it is critical to understand exactly what you are getting yourself into. This starts by understanding your income and expense account and understanding how you may use these accounts to your advantage.
All businesses are legally defined as companies even though they may be incorporated. This legal entity is called a corporation. A corporation is separate from its owners and considered a legal entity by the IRS. Corporations can be subdivided into classes of corporations depending upon their structure. At times, however, a corporation is treated as a single unit and its shares are collectively referred to as stockholders in the corporation.
A partnership, also referred to as a partnership, is a company that consists of more than one entity. Partnerships are most often operated for mutual benefit. They are not taxed as a business and are not considered a separate entity. There are many businesses that function as partnerships although they are not formally recognized as partnerships.
A general partnership is one in which all of the partners are legally regarded as one entity with the same legal rights and obligations. A general partnership will be taxed as a C corporation or Schedule C but will have many personal tax benefits. Unlike a partnership, partners have no shared liability for tax purposes.
Shareholders are individuals or entities that own a portion of a business or corporation. Corporate shareholders receive regular payments based on their dividends or interest. The amount of dividends received by a shareholder is referred to as a capital gain. When dividends are received the corporation or business is allowed to deduct the amount of the dividend as an income tax deduction.
Limited liability partnerships are formed for particular purposes. Partnerships may be established to manage a portfolio of assets, manage employee benefits, make purchases and sell property, or reduce losses from some business activities. Partnerships may also be established to carry on the business for the benefit of all stakeholders through the use of dividends or profits earned.