Forms of Business Organizations and Tax Considerations (2024)

In order to properly evaluate the economics of investment alternatives based on after tax analysis, it is required to consider all the activities related to tax and not the financial report or book. These are activities including revenue, costs, tax deductions, tax credits and so on with respect to the time that they occurred. Different types of business organizations have different tax considerations, and the person(s) who want(s) to form the business has/have to decide which type to choose. Here, we explain some of the most common business entity types for tax purposes.

Sole Proprietorship

• Sole Proprietorship is the simplest form of establishing a business.
• Sole Proprietorship is the most common structure to start a business.
• Only one person can be the owner.
• ​The owner has complete control on decisions.
• The owner collects all the profit.
• The owner is responsible and liable for all the debts, obligations, and risks.
• The business doesn’t pay tax (business entity is not taxed) separately.
• The business doesn’t have a separate entity than the owner.
• Sole Proprietorship has the lowest tax rate between business entities.

For more information you can follow these links:
Definition of Sole Proprietorship (watch the videos, please)
Article on Sole Proprietorship

Regular C-Corporation

• Is the most common form of business.
• Business has a separate entity.
• Owners are shareholders.
• Profits from the corporation are either retained to finance future investments, or are distributed to shareholders in the form ofdividends.
• The business entity is responsible for the debts, not the owners (owners are protected).
• Shareholders are protected from personal loss.
• Double taxation: Income is taxed twice: 1) Corporationpays income tax 2) After tax income distributed between shareholders (dividends) is taxed as well, at the personal level.

For more information you can follow these links:
Definition of C-Corporation
Article on C-Corporations

Sub Chapter S-Corporation

• Owners can convert an initially established C-Corporation to S-Corporation.
• Owners are protected similar to C-Corporation.
• Business has a separate entity.
• Just shareholders are taxed. There is no double taxation.

For more information can be found in following this Article on S Corporations

Partnership

• Partnership has more than one member (partner).
• Ownership is based on partners’ portion of contribution in forms of money, property, or skill.
• Distribution of profit and financial commitments are based on ownership.
• Similar to sole proprietorships, partners are responsible for all the liabilities of the business and also other partners.
• Unlike corporations, partners are not protected and partnership doesn’t limit the liability of partners.

For more information you can follow these links:
Definition of Partnership (watch the videos, please)
Article on Partnership

Limited Liability Company (LLC)

• Provides limited liability for members like corporations, but organized and taxed like partnership.

For more information you can follow these links:
Video: What is a Limited Liability Company? (1:59)
Article on LLCs

Master Limited Partnership (MLP)

• MLP acts like a corporation and its share is publicly traded.
• Profits for the MLP, however, are distributed among the partners like a partnership or LLC. There are therefore some tax advantages to the MLP structure (MLPs typically pay no income tax).
• This corporate structure originated in the oil and gas midstream sector (pipelines) but has since expanded to the upstream (exploration and production) sector.
• Because MLPs pay out all operating profits to shareholders, they cannot recycle profits into new investments. So MLPs in growth industries are constantly in capital markets raising new funds for investments. In the oil and gas sector, a crash in commodity prices reduces the value of MLPs and makes it harder for them to raise new capital to make new investments. Please read the article (on Canvas) fromThe Economist, "Running on Empty," to learn more.

For more information you can follow these links:
Definition of Master Limited Partnership (MLP) (watch the videos, please)
Article on Master Limited Partnership (MLP)