Business is one of the most important aspects of life. A successful business is defined simply as a commercial entity or company that engages in business activities for profit. In addition, a business can also be defined as any institution or partnership that combines members to undertake certain activities for mutual benefit. For example, a partnership is a formal relationship where two or more people form a business or group with a common purpose and objective. Other examples of business entities are corporations, partnerships, and other organized groups.
The concept of profit has long been recognized as a fundamental principle of business ethics. In business, profits are made or earned by a commercial entity by the use of a financial resource, called the “investment,” which generates future profits. Businesses that earn profits are usually described as public corporations or legal corporations. A privately held corporation that makes no public profits is not publicly traded, nor is it required to file reports with the Securities and Exchange Commission. Private companies often have less stringent standards for standards of corporate governance and public reporting requirements, so the exact definition of a corporation varies from one jurisdiction to another.
Some types of business structures are taxed at different rates than others. Corporations and partnerships are both taxed primarily at the corporate level, while sole proprietors are taxed only on their personal level. S corporations are corporations that elect several owners to serve as a single entity for tax purposes and are therefore able to deduct many business expenses. In addition, partnerships and limited liability partnerships are both taxed at the corporate level on a pro rata basis, so they are described as a type of corporations. Limited liability partnerships (LLPs) are pass-through entities, meaning that the profit made through the business is treated as a pass-through income and is not taxable by state taxation.
Tax law makes it possible to incorporate a limited liability company even if you do not own or control the partnership or LLC. When you form a limited liability company, you are creating a legal partnership. Therefore, you can include one partner and one primary owner, or multiple partners, as well as one general partner who acts as the company’s manager. A corporation, sole proprietorship, and partnership all incorporate as limited liability companies. Many business structure types also allow for “pass-through” income, which means that your personal taxes are only on the portion of your income that you receive directly, rather than being taxed through your business structure.
A corporation is completely taxed under U.S. federal law, but only partially taxed through the state level. Because corporations and partnerships have separate taxation rights, corporations and partnerships are often able to incorporate in states with lower tax rates than in the national level. Similarly, a limited liability company is totally taxed through a state structure but has no taxation on the partners individually. This allows LLCs and partnerships to incorporate in states with lower personal income tax rates while still receiving the benefits of pass-through status.
Limited liability companies and partnerships provide many unique advantages to businesses, but they require careful planning, business management, and an understanding of state and local rules and regulations. Incorporation is not something that should be entered into lightly. You must have an understanding of the advantages and disadvantages of incorporating. You must also understand the legal framework surrounding incorporation and how it can benefit and hurt your business. There are many resources available to help entrepreneurs learn more about incorporating and all the requirements that must be met before it can proceed. As you work toward making your business dreams a reality, you will want to continue to educate yourself about the process of incorporating and how it can benefit you and your business.