As soon as a small business has more than one owner, some form of official business structure must be selected and the appropriate papers filed with the state authorities. The official term for a partner or co-owner depends on whether you register your business as a partnership, limited liability company or S corporation. Each business type has features that may be important to how you want your business to function.
Pass-through Business Entities
All of the different business types commonly used by small businesses are pass-through entities for tax purposes. This means that the income and deductions generated by the company are passed along to the owners to claim on their individual income tax returns. These business types must still file the appropriate tax return for the chosen business structure, but no income taxes are paid at the company level. The business tax return will show what portions of the income and deductions have been allocated to each of the partners or co-owners.
A partnership is the simplest entity to use to form a company with two or more owners. You and your partner need to obtain a federal tax ID number from the Internal Revenue Service and file with your state regulators declaring your business as a partnership. Although it is not legally required, a partnership business should draw up a partnership agreement that details how the company will be run and the obligations of each of the partners. The assets of individual partners are not protected from lawsuits or legal action against the partnership. Owners of this type of company are partners.
Limited Liability Company
The limited liability company, or LLC, business structure allows the owners of a partnership-like business to be shielded from personal liability resulting from actions of the business. Each state provides rules concerning how an LLC must be set up and what paperwork must be filed. The LLC business type provides a lot of flexibility concerning how the owners manage the business and how the revenue and expenses are allocated among the owners. A small business LLC will usually file taxes as a partnership. The owners of an LLC are called members.
The corporation business structure also shields individual owners from personal liability. Corporations come in two basic types. C corporations file and pay taxes on the corporate profit. S corporations do not pay taxes at the corporate level; instead they pass the company's financial results through to the individual owners. The S corporation business structure is more complicated and more rigid as far as how the business is run and managed. An S corporation election can be attractive for a small business that wants to attract equity investors. The partners or co-owners of an S corporation are shareholders or share owners.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.