A sole proprietorship, as the name indicates, is a business owned and managed by a single individual. This person is solely accountable for the business operations and enjoys all the profits. Compared to other legal structures, sole proprietorships involve less paperwork and are subject to fewer business restrictions. Its simplicity and ease make it a favored business model. However, you will need to obtain local licenses to legally operate as a sole proprietor.
A partnership is defined as a business relationship between two or more individuals who jointly run a trade or business. Notably, a partnership does not pay taxes on its earnings. Instead, it must disclose its income and losses through Form 1065. The partnership also needs to issue a K-1 form to each partner, outlining their respective shares of profits and losses. These forms enable the IRS to monitor how profits and losses are divided among the partners.
To put it plainly, a corporation exists as a separate entity from its shareholders. Additionally, corporations provide limited liability protection to their directors and shareholders. Corporations are also treated as distinct taxpayers for federal tax purposes, meaning they must file their own federal income tax returns and pay their own income taxes accordingly.
S corporations are those entities that opt to pass their losses, deductions, and credits through to shareholders for federal tax purposes. The shareholders then include these profits and losses on their personal tax returns. It's also worth noting that S corporations are taxed based on the individual tax rates of their shareholders, thereby avoiding the double taxation typically imposed on corporate income.
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