- Appropriate selection of business structures to match needs of business owners, including: risk management, raising capital, tax planning, expense of operation, and ease of administration. Common business structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure has its distinct advantages and disadvantages.
. . . [T]he tax laws exist as an economic reality in the businessman’s world, much like the existence of a competitor. Businessmen plan their affairs around both, and a tax dollar is just as real as one derived from any other source.
— Justice John Marshall Harlan II, Commissioner v. Brown, 380 U.S. 563 (1965)
- Sole proprietorships: Sole proprietorships are owned by a single individual. Sole proprietorships are not distinct business entities and are not separate from their owners, exposing owners to unlimited personal liability. Earnings are subject to self-employment (SECA) taxes and personal income taxes. Sole proprietorships tend to be the simplest structures to form, operate, and administer.
- Partnerships: Partnerships have two or more owners and may be subdivided into general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs). General partners retain control of the business and are subject to unlimited personal liability. Limited partners retain limited control of the business and are subject to limited personal liability. LLPs protect each partner from liability incurred by other partners and the partnership. Partnerships are pass-through entities for federal tax purposes. General partners are subject to self-employment (SECA) taxes and personal income taxes; whereas, limited partners are subject to personal income taxes. Partnerships tend to be the simplest structures to form, operate, and administer for two or more business owners.
- Corporations: Corporations may have one or more shareholders and may be subdivided into C corporations, S corporations, B (benefit) corporations, close corporations, professional corporations, and nonprofit corporations (501(c)(3) corporations). Corporations offer limited personal liability to all shareholders. C corporations and B corporations are subject to corporate income taxes and distributions of dividends to shareholders are additionally subject to personal income taxes. S corporations are pass-through entities for federal tax purposes and shareholders are subject to personal income taxes. Nonprofit corporations may apply for exemption from federal and state income taxes but cannot distribute profits to shareholders. Corporations tend to be the most complex and expensive structures to form, operate, and administer. Corporations have a key advantage over other business structures in the relative ease of raising capital by sale of stock.
- Limited liability companies (LLCs): LLCs may have one or more members and offer limited personal liability to all members. LLCs are not recognized as distinct tax entities for federal tax purposes. By default, single member LLCs are treated as disregarded entities. Whereas, multiple member LLCs receive default treatment as partnerships. LLCs may elect for federal tax treatment as C corporations (IRS Form 8832), S corporations (IRS Form 2553), or nonprofit corporations (501(c)(3) corporations). LLCs offer many advantages possessed by corporations but are generally simpler and cheaper to form, operate, and administer than corporations. Notably, LLCs may have limited durations in some states and / or may require dissolution and reformation in some states if new members are added or existing members depart (in the absence of existing agreements for buying, selling, or transferring membership).
- Qualified joint venture status: Spousal co-owners of an unincorporated business (e.g., a general partnership which is not formally organized under state law, such as by obtaining a state certificate of partnership) may elect taxation as sole proprietors for federal tax purposes (i.e., elect qualified joint venture status) rather than default federal tax classification as a partnership. In order to elect qualified joint venture status and elect treatment as a disregarded entity for federal tax purposes, an unincorporated business must meet all of the following criteria: the business is wholly owned by a married couple filing a joint federal income tax return, both spousal co-owners materially participate in the trade or business, and both spousal co-owners consent to the election. Similarly, qualified joint venture status may be elected by non-corporate business entities organized under state law (e.g., limited partnerships, limited liability partnerships, or limited liability companies) meeting the same criteria required for unincorporated businesses as described above if the spousal co-owners are domiciled in a community property state and the non-corporate business entity is wholly owned by the spouses as community property. Once qualified joint venture status has been elected, it may be revoked only with permission of the Internal Revenue Service (IRS). Notably, the election will lapse automatically if spousal co-owners filing as a qualified joint venture fail to meet any of the requirements for filing the election in any year. Advantages of the election include simplified record keeping and federal tax return filing (i.e., no requirements to file federal income tax returns as a partnership) while allowing spousal co-owners to separately file self-employment (SECA) taxes to individually accrue credits for Social Security benefits and Medicare benefits.