The choice of entity and business structure that determines how you as a business owner will conduct your business is very important.  There are many options available to the business owner who is looking to begin a new business enterprise or even to someone who is buying an existing business.  Keep in mind that the laws and rules governing the different types of entities vary from State to State.  Before making this choice we highly recommend that you consult with a CPA (certified Public Accountant) and a qualified attorney.  There are many significant implications in the selection of business entity under which you will operate the information presented in this section is only to give the reader a general idea of the type of entities that are available.

The main types of business entities that you can operate under are:

1. Sole Proprietor
2. General Partnership
3. Limited Partnership
4. Limited Liability Partnership
5. S-corporation
6. C-corporation
7. Limited Liability Company

5.  S-Corporation

An S-corporation derives its name from sub-chapter S of the Internal Revenue Service Code.  A legal entity can elect to be an S-corporation as long as it meets certain criteria laid out in the regulations by the IRS.  Form 2553 must be filed with the IRS after all guidelines are met.

An S-corporation has some of the advantages of a corporation and the some of the taxation benefits of a partnership and many small businesses choose to become S-corporation entities.  Like a regular corporation, an S-corporation is a separate legal entity that has to formally file with appropriate state agency to get incorporated.  However, when it comes to taxation, an S-corporation works more like a partnership in that it does not pay taxes or earn income in its own name – all the income and taxes flow through directly to the shareholders who are part of the entity.  Thus if the S-corporation has only one owner than all the income flows through the personal taxes of that owner, if there are multiple owners then they income flows through their returns in the proportion of their ownership in the entity.  Thus there is no double taxation.  Also interest in stock of an S-corporation can usually be transferred.

Being that an S-corporation is a separate legal entity, its duration is perpetual unless it is dissolved.  Thus the death of one of the shareholders does not automatically dissolve the S-corporation as in the case of a sole proprietorship or general partnership.

Some of the disadvantages of an S-corporation is that income tax has to be filed by the business owner / partners along with their personal income tax and that can sometimes be challenging when business is very slow.  The IRS has also begun to view Subchapter S-corporation filings more carefully and business owners / partners may want to consider that when contemplating which business entity to consider.  Also important to know is that an S-corporation cannot be owned by a C-corporations, other S-corps, Limited Liability companies and partnerships.

When making business loans lenders usually like to see this form of incorporation along with a regular corporation since income is easily verifiable via personal taxes.