Business Types, United States
Disclaimer: This information is for educational purposes only and not to be used as tax or legal advice. Tax law and accounting protocol are constantly changing.
Business Types, United States
The legal structure of a business is referred to as the business entity. The entity choice has a significant impact on the taxes the owner(s) pay and tax returns that they will need to file. Accounting for different small business entities is similar in that Generally Accepted Accounting Principles (GAAP) will provide guidance so that the business will be on the accrual method, reconcile cash, and maintain a general ledger. Different structures will; however, have distinct differences in accounting for equity. The business entity choice is mix between legal and tax benefits while weighing compliance costs. Most legal benefits and operating rules are governed by the state, while taxation rules will be governed at the federal level.
Liability Protection and Piercing the Corporate Veil
Different business structures offer different liability protection to owners, depending on the laws of different states. In the case of sole proprietorships and general partnerships, no liability protection is granted under the law. Limited liability partnerships, limited liability companies, and corporations provide liability protection to owners, but not in all circumstances. These entities do little to protect individual owners who are negligent (not taking proper care) or break the law. Self-employed surgeons, for example, cannot rely on a corporation to protect their personal assets if they should happen to kill a patient while performing surgery drunk after a three day party binge on prescription medication stolen from the ER and shared at a club. In such a scenario, no protection is provided for the individual doctor, but shareholders would not be liable. Regardless of the business entity choice, insurance can be used to protect owners against professional liability.
Holding corporate and limited liability company owners personally liable for wrongful acts is referred to as piercing the corporate veil. The courts could hold the perpetrators of crimes be held personally liable regardless of the business structure in place. There are other action that owners can do that may effectively erode any protections under the law. If an owner does not follow the required entity protocols by co-mingling funds (combining business and personal accounts), does not pay state fees, or has fraudulent accounting, the courts may ignore the structure for legal purposes. Individual investor owners, chief executive officers, and chief financial officers may be held more responsible for corporate negligence.
Sole Proprietorship
The sole proprietorship is the most common entity structure in the United States and can be owned only by one person. A sole proprietorship has one owner that is personally liable for all business debts and lawsuits. To become a sole proprietor, an individual need only start operating as a business: Earning money and having expenses. By default, the sole proprietorship operates under an individual name; however, a business name may be established, known as a “DBA” which stands for Doing Business As. Income taxes are computed at the individual level, but property and local taxes may still be required. The business may have employees and is responsible for related taxes. Typical sole proprietorships are business that do not require outside investors and are small in nature such as: Consulting services, lawn care, and small dental practices.
Advantages
Sole proprietorships are low cost and require little to no setup. Some cities require registration and business property tax if the sole proprietor has significant property assets. Because it is not a separate entity for tax