Common Types of Business Entities
A business is defined by the US Department of the Treasury as an entity or individual conducting commercial, financial, or service activities for earning a profit. Businesses may be either private for-profit organisations or public non-profit organisations that conduct business to meet a social objective or further a social benefit. An owner can also be the sole proprietor of a business and in this case the business is considered to be undertaking a dual profession. In the United States, businesses are governed by Federal and State laws.
Private companies are limited in the amount they can earn from a share of the company’s stock capital. The same laws apply to partnerships and corporations. A partnership agreement may set a limit on the percentage of profits that any partners are entitled to. Similarly, most non-profit organisations must register to do business in a particular country. Non-profitable businesses are prohibited from making personal profits exempt from taxation.
When a business is conducted for profit, all earnings and gains are taxable unless the entity is incorporated as a corporation. States generally allow corporations to avoid double taxation by incorporating themselves as partnerships. Partnerships are seen as transactions between independent shareholders. A partnership can include one person and one corporation.
The differences between a corporation and a partnership are primarily based on the way in which property and assets are transferred between the shareholders in a corporation. Capital is transferred in a corporate transaction through a transferor, who is typically an individual. This transfer is responsible for ensuring that the funds remain invested and are used in the same ways as properties and assets in a corporation. Transferors can be corporations or individuals.
In contrast, in a partnership, the money generated by the partnership is not taxed until later, at the end of the year. Profits and losses are also generally not taxed. Businesses that incorporate as partnerships are also not personally liable for debts of the entity. Corporations are treated as legally separate entities from the shareholders that own them.
Many businesses, for example, employ people to perform contract jobs. Contract workers are employees that make personal efforts to maximize the companies’ profits. These personal efforts are considered profits, not because the workers have individually performed a particular job, but because they are performing a task within a larger entity. Both the worker and the company are considered to be profiting when profits are made.
Several businesses that fall into this category are charities and schools. Charities may receive donations in order to better their programs, service to the community or help build monuments. School programs may receive monetary aid from their community to help pay for school supplies, uniforms, books and other things needed for each day of classes. Non-profits may also receive grants from the government to assist in the operation of their programs. Many businesses also operate as nonprofits in order to maintain tax exemption.
Many businesses that have incorporated as partnerships are actually pass-through entities. This means that, unlike corporations, there is no corporate income tax because the profits are passed through an individual, called the partner, and are only taxed when they are disbursed to the shareholders. Examples of these businesses include professional services firms, contractors, and some types of entertainment. Partnerships are frequently established between unrelated third parties and therefore, there is often no need for a shareholders’ vote. Many partnerships are taxed as partnerships, even though there is no double taxation for the business because the income is taxed only once. In addition, because partnerships are considered a pass-through entity, their owners and partners are not personally liable for the taxes on the partnership’s income.