Sole Proprietorships:

The sole proprietorship is the easiest and least expensive form of ownership to organize.  The sole proprietorship owns all the assets of the business, receives all the income and has complete control.  All income passes through to the individual return of the sole proprietor. The owner has unlimited liability for any debts or liabilities of the sole proprietorship.  This puts all business and personal assets at risk in case of lawsuits.

Partnerships:

In a partnership, two or more people share ownership of the business. A partnership agreement should be drawn up that sets up how the business will be ran, how profits will be shared, how disputes will be solved as well as other issues.  Like a sole proprietor the partners receive all the income and have unlimited liability for the debts and liabilities of the business. Each partner is also responsible for the actions of the other partners.  All income will pass through to the partners individual tax returns, where income tax and self employment tax will be assessed.

Corporations:

A Corporation requires more time and money to setup and maintain.  A corporation's shareholders have limited liability for the corporation's debts or judgements.  IMPORTANT: Officers may be held personally liable for failure to withhold and pay employment taxes.  A corporation can raise funds by sale of stock.  A corporation is considered a separate entity and does not dissolve when ownership changes.  Taxes may be higher at the corporate level as dividends paid to shareholders are not deductible in determining corporate income.

S Corporations:

An election that allows the shareholders to treat the profits as distributions and have them pass directly to their personal returns. Unlike a partnership or sole proprietor the profits are not assessed the self employment tax.  If you are a woking shareholder, you must pay yourself reasonable wages.  The basic rules of the corporation apply although there are limitations on the number and type of shareholders.

Limited Liability Company (LLC):

There is a relatively new hybrid that is now permissable in most states. The LLC combines the limited liability of the corporation and the tax status of partnerships or corporations.  The formation of an LLC is more complex than a partnership and similar to a corporation.