Different Entities Mean Different Equity – Meet the Business Entities
From the accounting standpoint, you have only to deal with three entities, or forms of business: sole proprietorships, partnerships, and corporations. That’s because even though other forms exist, they share the same accounting structure as one of these three.
FACT
LLCs, the most common small-business entities, get to choose whether they want to be treated as partnerships or corporations for accounting and tax purposes. If they do nothing, they will automatically be treated as partnerships. To qualify for corporate treatment, they have to fill out a special IRS form.
Most transactions will be exactly the same, no matter which entity you use to create your company. A cash sale is still a cash sale; paying your phone bill works just the same. Others are unique to the entity type, mainly involving the equity accounts. The one you may be most concerned about is how you get to take money out of your business—and the entity you choose makes a pretty big difference there. The other major difference is the tax impact: some entities pay their own taxes; some leave that job to you, as the owner. Some entities have to file their own tax returns, even if you end up paying the taxes personally; some just get melded into your personal return.