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Introduction

A corporation is a legal entity that is created under the laws oI a state designed to establish the
entity as a separate legal entity having its own privileges and liabilities distinct Irom those oI its members.
There are many diIIerent Iorms oI corporations, most oI which are used to conduct business. Early
corporations were established by charter (i.e. by an ad hoc act passed by a parliament or legislature). Most
jurisdictions now allow the creation oI new corporations through registration.
An important (but not universal) contemporary Ieature oI a corporation is limited liability. II a corporation
Iails, shareholders normally only stand to lose their investment and employees will lose their jobs, but
neither will be Iurther liable Ior debts that remain owing to the corporation's creditors.























Sole- Proprietorship

A business structure in which an individual and his/her company is considered a single entity Ior tax and
liability purposes. A sole proprietorship is a company which is not registered with the state as a limited
liability company or corporation. The owner does not pay income tax separately Ior the company, but
he/she reports business income or losses on his/her individual income tax return. The owner is inseparable
Irom the sole proprietorship, so he/she is liable Ior any business debts also called proprietorship.
A business can be set up in a variety oI ways, ranging Irom a sole-proprietorship to a general partnership,
an LLC to a corporation. Corporations are remarkably diIIerent Irom other Iorms oI businesses in the
sense that it is an independent legal entity that is separate Irom the people who own, control and manage
it. Due to this recognition as an individual entity, it is viewed as a legal "person" in the view oI tax laws,
and can thus be engaged in business and contracts, can initiate lawsuits and it be sued. It also must pay
taxes.
orporation 1140
This type oI general, Ior-proIit corporation is reIerred to as a 'C corporation (reIerring to Chapter C in
the IRS code). "C Corporation" merely reIers to a regular, state-Iormed corporation. A corporation is
owned by shareholders and is managed and controlled by the board oI directors who elect the president
and are responsible Ior the management and policy decisions oI the corporation. The dealings oI the
corporation are carried out by the oIIicers and employees oI the corporation under the authority delegated
by the directors oI the corporation. To be incorporated an Incorporator must draIt legal documents and,
Iile the documents with the appropriate government agency, usually the Secretary oI State, and pay the
required Iees. In order to maintain corporate status, certain Iormalities must be observed, such as annual
meetings must be held, corporate minutes oI the meetings must be taken, oIIicers must be appointed, and
shares must be issued to shareholders. The corporation should issue stock to its shareholders and keep
adequate capitalization on hand to cover any Ioreseeable business debts.
Some reasons to choose this business structure include:
O our business needs the ability to issue stock or stock options to attract key employees or outside
investment capital.
O our business is so proIitable that you can save signiIicant income tax dollars by keeping some
proIits in the corporation each year. This strategy is called "income splitting" because proIits are
essentially split between the individual owners and the corporation itselI.
O ou own a Iamily business and you want to begin making giIts oI ownership to your Iamily as
part oI your Iinancial or estate plan or to plan Ior the next generation oI owners. With a
corporation it is possible to make giIts oI shares in your company without necessarily giving up
management control and without paying giIt tax.
O thers insist that you incorporate your business.
%he various forms of organization
The various Iorms oI organization are established by state law. There are a wide variety oI business
organizations recognized by the states. For example, a popular Iorm oI organization is the Limited
Liability Company (LLC). The LLC is a state designation. At the Iederal level, an LLC is taxed as a
partnership. II the LLC so chooses, it can be taxed as a corporation at the Iederal level. While there are a
variety oI designations at the state level, Ior federal tax purposes there are only 6 forms of business
organizations:
O Sole Proprietor (1040 Schedule C),
O Corporation (1120),
O Partnership (1065),
O S-Corporation (1120S),
O Trust (1041), and
O on-proIit organization (990)
O Limited Company (Ltd)
O Limited liability company(LLC)
O Limited liability limited partnership(LLLP)
O Limited liability partnership(LLP)
O Limited partnership(LP)
O Low-proIit limited liability company(L3C)
O Consumer cooperative
O olding Company


Limited Liability orporation LL

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are
popular because, similar to a corporation, owners have limited personal liability Ior the debts and
actions oI the LLC. ther Ieatures oI LLCs are more like a partnership, providing management
Ilexibility and the beneIit oI pass-through taxation. wners oI an LLC are called members. Since
most states do not restrict ownership, members may include individuals, corporations, other LLCs
and Ioreign entities. There is no maximum number oI members. Most states also permit 'single
member LLCs, those having only one owner.
A Iew types oI businesses generally cannot be LLCs, such as banks and insurance companies.
Check your state`s requirements and the Iederal tax regulations Ior Iurther inIormation. There
are special rules Ior Ioreign LLCs.
lassifications
The Iederal government does not recognize an LLC as a classiIication Ior Iederal tax purposes.
An LLC business entity must Iile a corporation, partnership or sole proprietorship tax return.
An LLC that is not automatically classiIied as a corporation can Iile Form 8832 to elect their
business entity classiIication. A business with at least 2 members can choose to be classiIied as
an association taxable as a corporation or a partnership, and a business entity with a single
member can choose to be classiIied as either an association taxable as a corporation or
disregarded as an entity separate Irom its owner, a 'disregarded entity. Form 8832 is also Iiled
to change the LLC`s classiIication.

4 Professional orporations:

A corporation Iormed Ior the purpose oI engaging in one oI the learned proIessions, such as law,
medicine, or architecture. Traditionally, corporations were prohibited Irom engaging in such
proIessions because they lacked the human, personal qualiIications necessary to pursue them.
Within recent years, however, most states have enacted a 57ofessional co75o7ation or association
act that allows proIessional persons to practice in the corporate Iorm provided that all
shareholders are members oI the proIession.

A proIessional corporation is a variation oI the corporate Iorm oI business organization that is
available to entrepreneurs who provide proIessional servicessuch as doctors, lawyers,
accountants, consultants, and architects. "ProIessionals," Frederick W. Dailey explained in his
book Tax Savvy fo7 Small Business, "are treated as small businesses under the tax code. Most oI
them operate as sole proprietorships or partnerships, and are subject to the same tax rules as other
similar businesses. owever, certain proIessionals who oIIer services may Iorm and operate a
special type oI entity, called a proIessional corporation." Some states require proIessionals to
Iorm this type oI entity iI they wish to incorporate. In a proIessional corporation, the owners
perIorm services Ior the business as employees.
The Iirst laws that permitted the Iormation oI proIessional corporations were intended to give
proIessionals some oI the tax advantages enjoyed by corporations without also giving them the
beneIit oI limited liability. II a regular corporationwhich is a distinct entity under the law
becomes insolvent, its creditors can only claim business assets Ior the repayment oI debts, not the
personal assets oI its owners. This is in contrast to regular proprietorships and partnerships, which
are not legally distinct Irom their owners or partners. Since personal responsibility is a key Iactor
in being a proIessional, the law could not allow proIessionals to escape liability Ior their own
actions by incorporating. The lines between diIIerent Iorms oI business organization have been
blurred in recent years, however, as more tax advantages have become available to sole
proprietorships and partnerships, and more limited liability has been granted to proIessional
corporations.

5. Partnership orporation
Partnerships are unincorporated businesses. Like corporations, partnerships are separate entities Irom the
shareholders. Unlike corporations, partnerships must have at least one General Partner who assumes
unlimited liability Ior the business. Partnerships must have at least two shareholders. Partnerships
distribute all proIits and losses to their shareholders without regard Ior any proIits retained by the
business Ior cash Ilow purposes. (LLCs are taxed as partnerships, unless they choose to be taxed as
corporations.)
In a general partnership, each oI the two or more partners will have unlimited liability Ior the debts oI
the business. The income and expense is reported on a separate return Ior tax purposes, but each partner
then reports his or her pro-rata share oI the proIit or loss Irom the business as one line on his personal tax
return.
Limited Partnership: With a limited partnership, each oI the general partners has unlimited liability Ior
the debts oI the partnership, but the limited partner's exposure to the debts oI the partnership is limited to
the contribution each has made to the partnership. With certain minor exceptions, the reporting Ior tax
purposes is the same as Ior a general partnership.




#eferences
1. http://www.answers.com/topic/proIessional-corporation#ixzz1a5bykn6o

2. http://www.entrepreneur.com/encyclopedia/term/82690.html

3. http://taxes.about.com/od/scorporations/qt/scorpcriteria.htm