Business Types of Ownership

One of the first decisions that you will have to make as a business owner is how the company should be structured. This decision will have long-term implications, so consult with an accountant and attorney to help you select the form of ownership that is right for you. In making a choice, you will want to take into account the following:

  • Your vision regarding the size and nature of your business.
  • The level of control you wish to have.
  • The level of structure you are willing to deal with.
  • The business’ vulnerability to lawsuits.
  • Tax implications of the different corporate ownership structures.
  • Expected profit (or loss) of the business.
  • Whether or not you need to reinvest earnings into the business.
  • Your need for access to cash out of the business for yourself.

Sole Proprietorships

The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.

Advantages of a Sole Proprietorship:

  • Easiest and least expensive form of ownership to organize.
  • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
  • Sole proprietors receive all income generated by the business to keep or reinvest.
  • Profits from the business flow directly to the owner’s personal tax return.
  • The business is easy to dissolve, if desired.

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Disadvantages of a Sole Proprietorship:

  • Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
  • May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
  • Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).

Federal Tax Forms for Sole Proprietorship:
(only a partial list and some may not apply)

  • Form 1040: Individual Income Tax Return
  • Schedule C: Profit or Loss from Business (or Schedule C-EZ)
  • Schedule SE: Self-Employment Tax
  • Form 1040-ES: Estimated Tax for Individuals
  • Form 4562: Depreciation and Amortization
  • Form 8829: Expenses for Business Use of your Home
  • Employment Tax Forms


In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. Yes, it’s hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc.

Advantages of a Partnership:

  • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
  • With more than one owner, the ability to raise funds may be increased.
  • The profits from the business flow directly through to the partners’ personal tax returns.
  • Prospective employees may be attracted to the business if given the incentive to become a partner.
  • The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership:

  • Partners are jointly and individually liable for the actions of the other partners.
  • Profits must be shared with others.
  • Since decisions are shared, disagreements can occur.
  • Some employee benefits are not deductible from business income on tax returns.
  • The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1- General Partnership
Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.

2) Limited Partnership and Partnership with limited liability
Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnershipis more complex and formal than that of ageneral partnership.

3) Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.

Federal Tax Forms for Partnerships:
(only a partial list and some may not apply)

  • Form 1065: Partnership Return of Income
  • Form 1065 K-1: Partner’s Share of Income, Credit, Deductions
  • Form 4562: Depreciation
  • Form 1040: Individual Income Tax Return
  • Schedule E: Supplemental Income and Loss
  • Schedule SE: Self-Employment Tax
  • Form 1040-ES: Estimated Tax for Individuals
  • Employment Tax Forms


A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation:

  • Shareholders have limited liability for the corporation’s debts or judgments against the corporations.
  • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
  • Corporations can raise additional funds through the sale of stock.
  • A corporation may deduct the cost of benefits it provides to officers and employees.
  • Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation:

  • The process of incorporation requires more time and money than other forms of organization.
  • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

Federal Tax Forms for Regular or “C” Corporations:
(only a partial list and some may not apply)

  • Form 1120 or 1120-A: Corporation Income Tax Return
  • Form 1120-W Estimated Tax for Corporation
  • Form 8109-B Deposit Coupon
  • Form 4625 Depreciation
  • Employment Tax Forms
  • Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

Subchapter S Corporations

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Federal Tax Forms for Subchapter S Corporations:
(only a partial list and some may not apply)

  • Form 1120S: Income Tax Return for S Corporation
  • 1120S K-1: Shareholder’s Share of Income, Credit, Deductions
  • Form 4625 Depreciation
  • Employment Tax Forms
  • Form 1040: Individual Income Tax Return
  • Schedule E: Supplemental Income and Loss
  • Schedule SE: Self-Employment Tax
  • Form 1040-ES: Estimated Tax for Individuals
  • Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.

Federal Tax Forms for LLC:

Taxed as partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.

In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. Use your key advisers to assist you in the process.

Choose your Business Structure

Business structure Ownership Liability Taxes
Sole proprietorship One person Unlimited personal liability Personal tax only
Partnerships Two or more people Unlimited personal liability unless structured as a limited partnership

Self-employment tax (except for limited partners)

Personal tax

Limited liability

company (LLC)

One or more people Owners are not personally liable

Self-employment tax

Personal tax or corporate tax

Corporation – C corp One or more people Owners are not personally liable Corporate tax
Corporation – S corp One or more people, but no more than 100, and all must be U.S. citizens Owners are not personally liable Personal tax
Corporation – Nonprofit One or more people Owners are not personally liable Tax-exempt, but corporate profits can’t be distributed


2018 Federal Income Tax Table

If taxable income is:
Married Filing Jointly:
Over But Not Over The Tax Is Of The 
Amount Over
$0 $19,050 $0 + 10% $0
$19,051 $77,400 $1,905 + 12% $19,050
$77,401 $165,000 $8,907 + 22% $77,400
$165,001 $315,000 $28,179 + 24% $165,000
$315,001 $400,000 $64,179 + 32% $315,000
$400,001 $600,000 $91,379 + 35% $400,000
$600,001 And Over $161,379 + 37% $600,000
Over But Not Over The Tax Is Of The 
Amount Over
$0 $9,525 $0 + 10% $0
$9,526 $38,700 $952.50 + 12% $9,525
$38,701 $82,500 $4,453.50 + 22% $38,700
$82,501 $157,500 $14,089.50 + 24% $82,500
$157,501 $200,000 $32,089.50 + 32% $157,500
$200,001 $500,000 $45,689.50 + 35% $200,000
$500,001 And Over $150,689.50 + 37% $500,000


Estates and Trusts:
Over But Not Over The Tax Is Of The 
Amount Over
$0 $2,550 $0 + 10% $0
$2,551 $9,150 $255 + 24% $2,550
$9,151 $12,500 $1,839 + 35% $9,150
$12,501 And Over $3,011.50 + 37% $12,500


Over But Not Over The Tax Is Of The 
Amount Over
The Tax Cuts and Jobs Act of 2017 permanently drops the corporate tax rate to 21%, beginning in 2018.
2014 – 2018 Long Term Capital Gains Tax
Rates on dividends and gains for assets held over 12 months
10% income tax bracket or below 0%
15% income tax bracket or above 0%
25% income tax bracket or above 15%
28% income tax bracket or above 15%
33% income tax bracket or above 15%
35% income tax bracket or above 15%
39.6% income tax bracket or above 20%
2013 Capital Gains Tax
10% income tax bracket or below 10%
15% income tax bracket or above 10%
25% income tax bracket or above 20%
28% income tax bracket or above 20%
33% income tax bracket or above 20%
35% income tax bracket or above 20%
2008 – 2012 Capital Gains Tax
15% income tax bracket or below 0%
25% income tax bracket or above 15%
Capital Gains rate on collectibles 28%
Standard Deductions Married Filing Jointly Head Of House-
Single Additional (Age 65/older, 
or blind):
Unmarried and not surviving spouse AGI itemized deduction phase-out: Married Filing Separately All Others
2006 $10,300 $7,550 $5,150 $1,000 $1,250 $75,250 $150,500
2007 $10,700 $7,850 $5,350 $1,050 $1,300 $78,200 $156,400
2008 $10,900 $8,000 $5,450 $1,050 $1,350 $79,975 $159,950
2009 $11,400 $8,350 $5,700 $1,100 $1,400 $83,400 $166,800
2010 $11,400 $8,400 $5,700 $1,100 $1,400 Repealed Repealed
2011 $11,600 $8,500 $5,800 $1,150 $1,450 Repealed Repealed
2012 $11,900 $8,700 $5,950 $1,150 $1,450 Repealed Repealed
2013 $12,200 $8,950 $6,100 $1,500 $1,200 $150,000 $300,000
2014 $12,400 $9,100 $6,200 $1,200 $1,500 $152,525 $305,050
2015 $12,600 $9,250 $6,300 $1,250 $1,550 $154,950 $309,900
2016 $12,600 $9,300 $6,300 $1,250 $1,550 $155,650 $311,300
2017 $12,700 $9,350 $6,350 $1,250 $1,550 $156,900 $313,800
2018 $24,000 $18,000 $12,000 $1,300 $1,600 $266,700 $320,000

*The material represented hereon is provided for informational purposes only and should not be construed as tax or legal advice. The information presented here has been obtained from publicly available sources and is believed to be accurate and current. You may attain more comprehensive IRS tax tables at Always consult a qualified tax planning advisor.


You’ve taken the plunge and formed your business as a Delaware corporation. What do you need to do next? This post, along with the companion piece 8 Legal To-Dos Before Your First Investment, is intended to help you identify other steps you should be taking as you launch your business and prepare to take on investment.

1) Complete Issuances of the Founders Stock. Most companies issue stock to their founders at a very low price at the time of formation. It’s important that these issuances actually get finalizedat or near the time of formation because, under IRS rules, if stock is sold at less than fair market value at the time of the sale the difference between the price paid and the fair market value will be considered compensation to the stockholder, which means he or she will have to pay taxes on it. When a company is in its infancy the fair market value of its equity typically is close to zero, which enables founders to purchase significant stakes in the company at a very low cost. But the company may increase in value very quickly, making these issuances cost prohibitive.  So complete these issuances as soon as possible, including collecting all signatures on the purchase documents, receiving and cashing checks from the stockholders (assuming some or all of the consideration being paid for the stock is in the form of cash) and maintaining evidence of payment in the company’s records.

2) File 83(b) Elections. If any stockholders are receiving stock that is subject to vesting they should strongly consider filing an 83(b) electionwith the IRS. For an 83(b) election to be effective it needs be filed within 30 days of the time of the sale of the stock, with NO EXCEPTIONS. For an explanation of what an 83(b) election is and whether it makes sense for you click here.

3) Set up a Datasite. When a company is raising capital from outside investors, those investors will typically want to review the company’s legal documentation, including paperwork related to the company’s formation and issuances of stock. Keeping these documents stored in an organized fashion from the beginning will help avoid delays and speedbumps that can be associated with poor recordkeeping. Click hereto see a sample VC due diligence request list and understand the type of documents you should be storing.

4) Apply for an EIN. An Employee Identification Number, or EIN, is a unique number that identifies a company to the IRS. It is required to open a bank account, hire employees and file tax returns. You can apply for an EIN on the IRS’ website here.

5) Open a Checking Account and Get a Company Credit Card. One of the key benefits of setting up a business entity is to protect the business’ stockholders from personal liability for liabilities of the business. As part of ensuring that these limitations on liability are respected, founders should set up a checking account and credit card in the name of the company and use those accounts (rather than personal accounts) for all payments made by or to the company. Founders can loan capital to the company but should keep good records of these transactions and avoid moving money back and forth between their personal accounts and the company’s accounts.

6) File State and Local Registrations. Most states require companies that are formed in other states (like Delaware) to register to do business in the states in which they are doing business. If you are using a registered agent service such as Corporate Service Company or Corporation Trust Company, this company can help guide you through the process for a small fee, and your law firm should be able to help you coordinate this process as well. You should also look into whether you need to apply for a state level identification number and other state, county and/or city level registrations. Your state’s employment and tax agency’s website is a good source of information for this – California’s is located here.

7) Get Insurance. As the business starts operating you will want to obtain some basic insurance, including general liability insurance and, in connection with hiring your first employees, workers’ compensation insurance. Your insurance needs and recommended policies will expand as your business grows, you have publicly available products and services, and your board of directors  A good insurance broker can be a huge help with this process — ask your mentors and advisors for recommendations.

8) Prepare to Hire Your First Employee. Employment is a highly regulated area of law and there are several steps you should take to make sure you are complying with applicable rules and regulations. Many early stage companies outsource this task to payroll services providers, but for DIY-types the federal government has posted a useful guide here.

9) Create a Capitalization Table. A capitalization table is a list of a company’s securities (i.e., stock, options, warrants, etc.) and who owns those securities, usually maintained in a spreadsheet. You should create a capitalization table so you understand the ownership structure of your company and can make decisions accordingly. Hereis a great post on what a cap table is, why you need one and what it should look like (including a sample).  Companies can coordinate cap table management with their outside counsel, and companies are increasingly using capitalization management services – ask your advisors for recommendations.

10) Consider Hiring an Accounting Service. Each business has accounting, bookkeeping and tax needs and these will grow as your business grows. Some founders are comfortable doing this on their own, but many companies find that they can outsource these tasks and receive high quality service at a reasonable price. There are many services that are geared specifically towards startups – ask your mentors and advisors for recommendations.


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