A Taxpayer Identification Number is an identification number used by the Internal Revenue Service in the administration of tax laws. It is also known as an Employer Identification Number (“EIN”). An EIN is the same as social security number for yourself, except that an EIN is for your business. An EIN allows you to identify your business on state and federal government forms. You will need to obtain an EIN if: • you have employees • your business is a corporation or a partnership • you withhold taxes on income, and you file for employment, excise or alcohol, tobacco and firearm taxes • you want to open a bank account in a corporate or other non-individual name.
A sole proprietorship is you doing business as yourself. As a result, no organizational documents are required for formation of a business as a sole proprietorship. It is the simplest form of doing business. A sole proprietorship does not have a distinct existence separate and apart from the owner of the business. Therefore, this form of entity does not provide the owner of the business any shield, or protection, from personal liability for the obligations of the business.
A general partnership is a business arrangement of more than one individual to conduct a business for profit as “partners.” Any combination of individuals and legal entities can form a general partnership. Although a general partnership is a legal entity separate from the owners, each partner of the general partnership is personally responsible for all obligations of the general partnership. Anything one partner does affects all of the partners. Like a sole proprietorship, a general partnership may operate under a fictitious name.
A limited partnership (“LP”) is a business arrangement of one or more general partners and one or more limited partners, to conduct business for profit as co- owners. Except under certain situations, a limited partner is not liable for the obligations of the LP unless the limited partner participates in the control of the business. The general partners participate in the control of the business and unlike, the limited partners, the general partners have unlimited liability for the LP’s obligations. A corporation or other type of legal entity may be a general partner to limit liability to the corporate general partner’s assets, so that the personal assets of the owners of the corporation are not at risk.
A corporation is a legal business entity separate and apart from its owners. Owners of a corporation are called “shareholders.” Shareholders are not personally liable for the obligations of the corporation. A corporation can have perpetual life, centralized management, and freely transferable interests. The liability of the shareholders is limited to the assets contributed to the corporation. A C-corporation is a corporation in the United States that for federal income tax purposes is taxed under Subchapter C of Chapter 1 of the Internal Revenue Code. A C-corporation has two levels of taxation, no restrictions on the number of shareholders, and is subject to accumulation tax. An S-corporation is a corporation that makes an election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. An S-corporation is not taxed on its earnings as a corporation. Rather, the profits of the corporation are passed through to the shareholders for tax purposes, and thus, only taxed once. An S corporation has limits upon the number of shareholders, and the types of shareholders.
A limited liability company (“LLC”) combines the best aspects of the corporations and partnerships. An LLC limits the liability of its owners the way a corporation does, permits the owners to participate in the management of the LLC, and yet still provides the pass through income tax treatment of a partnership or S-Corporation. The owners of the LLC are called “members”.
