Video:What Are the Types of Business Organizations?

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Transcript:What Are the Types of Business Organizations?

Quick View of the Types of Business Organizations

While there are a variety of designations at the state level, for federal tax purposes there are only 6 forms of business organizations:

• Sole Proprietor
• Corporation
• Partnership
• S-Corporation
• Trust, and
• Non-profit organization

What Are the Types of Business Organizations for Tax Purposes?

Sole proprietors are unincorporated businesses. They are also called independent contractors, consultants, or freelancers. There are no forms you need to fill out to start this type of business. The only thing you need to do is report your business income and expenses on your Form 1040 Schedule C.

Corporations are incorporated businesses. Every form of business besides the sole proprietor is considered a separate entity, and this often provides a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations are presumed to be for-profit entities, and as such they can have an unlimited number of years with losses. Corporations must have at least one shareholder.

Partnerships are unincorporated businesses and they are separate entities from the shareholders. Partnerships must have at lease one General Partner who assumes unlimited liability for the business and at least two shareholders. Partnerships distribute all profits and losses to their shareholders without regard for any profits retained by the business for cash flow purposes.

An S-Corporation must have at least one shareholder, and cannot have more than 100 shareholders. If any shareholder provides services to the business, the S-Corp must pay that shareholder a reasonable salary. This salary is a separate payment from distributions of profits or losses.

Trusts are usually formed upon the death of an individual and are designed to provide continuity of the investments and business activities of the deceased individual.

Nonprofits are corporations formed for a charitable, civic, or artistic purpose. Nonprofits are generally exempt from federal and state taxation on their income, and so they are often called "exempt organizations." Nonprofits have substantial responsibilities for reporting their activities, income, and assets to ensure that they are in compliance with federal and state laws governing charities.

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