Our Mankato business lawyers practice in the following areas:
- Business Start-up and Formation
- Buy-Sell Agreements
- Commercial Leasing
- Mergers and Acquisitions
- Business Succession Planning
- Shareholder/Owner Disputes
- Commercial Real Estate Development
- Governance Issues
- Entity Restructures
- Business Financing
Sole proprietorships constitute over two-thirds of American businesses. They are the easiest, most flexible, and least expensive business forms to set up. The proprietor bears all of the financial risk of losses and liability.
Income and deductions are reported on the sole proprietor’s individual income tax return (Form 1040) on Schedule C at the individual’s income tax rates. A proprietorship has the same year end as the individual proprietor, which is nearly always a calendar year end. Method of accounting is determined by the nature of the business. Proprietor is only liable for self-employment tax. Sole proprietors do not pay unemployment tax. FICA tax must be paid for services rendered by spouse and by children over 18 who are employed in their parent’s trade of business. Qualified retirement plans may be established.
A partnership is two or more persons, as co-owners, carrying on a business for profit. Partners share in the profits or losses. They also share in any tax burdens or benefits. A partnership need not be formally reduced to an actual written agreement.
Not a taxpayer but merely a conduit through to the partners to be taxed at the partner’s individual rates. A partner is not considered an employee of the partnership. Partners are not employees so they pay no FICA tax on their income from the partnership. The partners are considered self-employed and are required to pay the federal self-employment tax on their share of the income. Partners come under Keogh (HR-10) Plan rules for qualified retirement plans. When furnished to partners, certain fringe benefits are not deductible by the partnership such as health insurance, death benefits, life insurance, etc.
A corporation is formed under state law by filing a document entitled Articles of Incorporation. A corporation is governed by a Board of Directors, which elects officers. Corporations can elect to be either “C” corporations or “S” corporations.
A “C” corporation is a separate legal entity and files a separate corporation income tax return. Corporate income may be passed through to shareholders in the form of dividends. Compensation paid to employees is subject to employer and employee share of FICA tax. Corporation must pay unemployment compensation tax. Corporation can adopt qualified retirement plans. A “C” Corporation is generally free to choose its own taxable year.
An “S” corporation is treated like a partnership as a “pass-through” entity for tax purposes. An “S” corporation must prepare and file income tax return, but it avoids all tax at the entity level.
Liability is limited for all corporations. Shareholders are not liable for corporate debts. The liability of shareholders is limited to the amount of their investments.
Limited Liability Company
An LLC is a form of business entity created exclusively under state law. The LLC combines the flow-through tax attributes of a partnership, while limiting the liability of the entity’s owners to their investment in the LLC.
One-member LLCs are taxed as sole proprietorships. LLCs with more than one member report their income on a partnership tax form. There is no tax liability for the LLC. It is merely a conduit, passing through to the member or members.
The liability of LLC members is, as the name implies, limited to their respective investments. Members are not personally liable for obligations.
Limited Liability Partnerships
An LLP is a form of business entity created exclusively under state law. It is a type of partnership governed by the same laws as general partnerships, except for certain provisions applicable only to LLP’s. The key difference between an LLP and a general partnership is the limited liability shield provided to partners of an LLP.
There is no separate tax liability for an LLP. The partners report their income on a partnership tax form. Once again, it is merely a conduit, passing through to the member or members.
Partners of an LLP, unlike partners in a general partnership, are not personally liable for liabilities arising from the wrongful acts or omissions of any other partners or for any other debts of the LLP, if the liability or debt arose or accrued while the partnership had the appropriate registration in effect.
This webpage contains general information and not legal advice. It is based on Minnesota law in effect at the the time of writing. An attorney at Farrish Johnson can advise you about how the law applies to your specific situation.