A sole proprietor is one individual who owns a company that is not incorporated or registered with the state as a limited liability company (LLC) or Corporation. Sole proprietors may or may not have employees.

In a sole proprietorship:

• The business does not exist separately from the owner.
• The risks of business apply to the individual’s personal assets, including those not used for the business.
• The sole proprietor reports business income on his or her individual tax return.

A limited liability company (LLC) is a structure allowed by state statute. An LLC is formed by filing articles of organization with the individual state’s secretary of state. Owners of an LLC are called members. Members may include individuals, corporations, other LLCs, and foreign entities. An LLC can be formed by one or more members, and there is no maximum number of members.

There can be no more than one active LLC with the same name in the same state.

For federal tax purposes, an LLC may be treated as a partnership or a corporation, or be disregarded as an entity separate from its owner.

An LLC can also be organized as a professional limited liability company (PLLC) or a limited company (LC).

A corporation is a legal entity established by a charter granting it certain legal powers, rights, privileges, and liabilities. A corporation can be established by a person or group of people with a charter from the state’s secretary of state. After a corporation is created, it becomes its own entity and generally has an indefinite lifespan.

An estate (or decedent estate) or succession is a legal entity created as a result of a person’s death. The estate consists of the real estate and/or personal property of the deceased person. The estate pays any debts owed by the decedent, and distributes the balance of the estate’s assets to the beneficiaries of the estate.

A trust is a legal entity that is created under state law and is taxed under federal law. The trust can be created to perform one act or a series of acts. The two most common types of Trusts are Irrevocable and Revocable Trusts:

Irrevocable Trust – In an irrevocable trust the grantor has no control of the trust (the trust cannot be repealed or annulled) and the trust will pay tax.

Revocable Trust – A revocable trust is a trust that may be altered or terminated during the grantor’s lifetime. Since the trust may be altered at any time until the grantor’s death, it is considered part of the grantor’s estate and is subject to taxation. The property is passed on to the beneficiaries only after the grantor’s death, and the revocable trust then becomes irrevocable.

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants.

• Partners can be individuals, corporations, trusts, estates, and other partnerships.
• Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
• A partnership does not pay tax on its income, but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax returns.

For tax purposes, a “church” refers to any organization claiming to be a church or any convention or association of churches. The word “church” includes temples, mosques, and other houses of worship. To be considered a church for tax purposes, a group must be part of an organized religion, must have a mission statement, and must be formally organized as a distinct legal entity. Certain characteristics are generally attributed to churches. They include:

• A distinct legal existence and religious history
• A recognized creed, form of worship, and literature of its own
• A definite and distinct ecclesiastical government including a formal code of doctrine and discipline
• An organization of ordained ministers, selected after completing prescribed courses of study
• Established places of worship with regular congregations, religious services, and/or religious instruction for members.

Non-profit organizations include corporations, trusts, limited liability companies, and unincorporated associations that qualify for tax-exempt status under Internal Revenue Code (IRC) 501(a) as described in Publication 557 (Tax-Exempt Status for Your Organization).

Non-profit organizations include: public charities, private foundations, educational organizations, employee associations, veteran’s organizations, business leagues, state-chartered credit unions, child care organizations, homeowners/condo associations, sports teams, political organizations, scholarship funds, PTA/PTO or School Organizations and teachers’ retirement fund associations. This list is not all-inclusive.

Sole proprietors and partnerships cannot be considered for tax-exempt status. For-profit organizations cannot be considered for tax-exempt status.

A corporation is a person or group of people who establish a legal entity by filing articles of incorporation with the state’s secretary of state granting it certain legal powers, rights, privileges, and liabilities. An S corporation is an eligible domestic corporation that wants to avoid double taxation (once to the shareholders and again to the corporation) by electing this status using Form 2553 (Election by a Small Business Corporation).

Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. An S corporation is not a sole proprietor or partnership.

A personal service corporation is a person or group of people who establish a legal entity by filing articles of incorporation with the state’s secretary of state granting it certain legal powers, rights, privileges, and liabilities. A personal service corporation is an organization in which the activity involves the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

In a personal service corporation, substantially all of the stock is owned by the employees who perform the services. A personal service corporation sells its ideas or expertise rather than tangible goods. A personal service corporation is not a sole proprietor or partnership.