1.1.1. Overview: Legal and Tax Entities
As a legal entity, a corporation is a business organization separate from its owners. It is guided by an elected board of directors who select officers to run its daily operations. The corporation itself, not its owners, is liable for its debts and obligations. Most corporations issue stock, which may be publicly issued and freely traded (general corporations). Others are privately issued and tightly held (close corporations). Non-stock corporations may be not-for-profit (nonprofit corporations) or for-profit (private corporations).
Unlike the corporation, a partnership is a legal entity begun by two or more persons who agree to operate it and share directly in its profits and losses. This “pass-through” entity is actively operated either by all the partners (general partnership) or a few of the partners (limited partnership). Depending on the type of partnership, owners may or may not be personally liable for the debts and liabilities of the company.
Limited liability companies (LLCs) combine aspects of a corporation with those of a partnership. Like a partnership, they are “pass-through” entities, sending profits and losses directly to their owners. Like a corporation, all their owners are protected from personal liability for business debts and claims, and the business itself is liable.
For income tax purposes, the IRS has its own classification of a business enterprise. Its two types of corporation are the C corporation, which is taxed as a separate entity, and the S corporation, which is taxed as a partnership. They get their names from Subchapter C and Subchapter S of the Internal Revenue Code (IRC). A partnership is any “pass through entity,” regardless of its legal structure. A disregarded entity is a single-owner business that is separate from its owner but elects not to be regarded as separate for income tax purposes.
Any corporation has no choice but to be taxed as a corpor