S corporation is one of the most common business structures found in the United States. Since its creation, many businesses which once filed as a corporation have elected to switch over to an s corporation. Many newly formed businesses also choose this entity type. This is due to the advantages that this entity type brings. With this, there are also some disadvantages and limitations that apply for s corporations.
The biggest reason this entity type is so popular is because it allows owners the opportunity to receive the benefits of being a corporation, while avoiding the double taxation that it comes with. In addition to this, they enjoy the benefit of limited liability. This means that owners cannot be held personally liable for debts or other obligations. In order to elect as an S Corporation, businesses must file Form 2553 - Election by a Small Business Corporation. They then file Form 1120S - U.S. Income Tax Return for an S Corporation and issue each shareholder a K-1.
There are some restrictions for s corporations that apply. These include a maximum of 100 shareholders, all of which must be U.S. residents or resident aliens. Shareholders must also be individuals, trusts, or estates. The business can only have one class of stock.
Click this link to learn more on S Corporations:
A partnership is a business which is owned by two or more “partners”. They are similar to Sole Proprietorships in that the business is not recognized as a separate entity. Holding the partners liable for debts and other obligations. With this business structure, the company itself is not taxed, but each partner pays taxes individually.
Like S corporations, Partnerships are required to file informational returns to the IRS, most states require businesses to file a return as well. Owners will then report income on their personal tax returns and avoid double taxation. The Partnership is required to file Form 1065 - US Return of Partnership and most states also require a Partnership to file if they conduct business in that particular state.
Here is a link to the IRS partnership information page:
Sole Proprietorships are common entity types among smaller businesses. When someone decides to open a business, Sole Proprietorship is the structure which automatically applies. It will stay this way until an owner elects to file as another business type. Sole Proprietorships are owned by a single person. The biggest advantage for this type is the convenience and simplicity it provides.
The biggest drawback that comes with it is liability. With no legal distinction between the business and the owner, the owner becomes personally liable for any debts or other obligations that can occur. Unlike Partnerships and S Corporations, Sole Proprietorships do not need to file a separate return for the business, they instead report income on their federal Form 1040 - US Individual Income Tax Return.
More information can be found on the IRS website linked here: