Bookkeeping Kit For Dummies
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The four different types of business structures often involve different kinds and levels of accounting that the bookkeeper must be aware of and capable of performing.

  • Sole proprietorship: Most new businesses with only one owner start out as sole proprietorships, and many never become anything else. To start a business as a sole proprietor, you don’t have to do anything official like file government papers or register with the IRS. Sole proprietorships aren’t taxable entities. Most sole proprietors add Schedule C — a “Profit or Loss from Business” form — to their personal tax returns.

  • Partnership: The IRS automatically considers any business started by more than one person to be a partnership. Each person in the partnership is equally liable for the activities of the business. A partnership is the most flexible business structure for a business that involves more than one person. Partnerships aren’t taxable entities, but partners do have to file an informational IRS Form 1065 with their personal tax returns.

  • Limited Liability Company (LLC): This business form falls somewhere between a corporation and a partnership or sole proprietorship in terms of protection by the law. In most states, LLC owners get legal protection from lawsuits like a corporation. Reporting requirements for LLCs aren’t as strict as they are for a corporation. LLCs don’t have to pay corporate taxes or file all the forms required of a corporation. The IRS treats LLCs as partnerships or sole proprietorships unless they specifically ask to be taxed as corporations.

  • S or C corporation: Corporations are separate legal entities, and their owners are protected from claims filed against the corporation’s activities. However, the obligations that come with incorporating are tremendous, and a corporation needs significant resources to pay for the required legal and accounting services. There are two types of corporate structures:

    • S corporation: This corporation has fewer than 100 shareholders and functions like a partnerships but gives owners additional legal protection.

    • C corporation: This corporation is a separate legal entity that files its own tax returns. It is treated in the courts more or less like a person. Owners must split their ownership by using shares of stock.

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