1. Sole Proprietorship: A one-person operation. The business may have a number of employees or hired persons; but the proprietor owns, runs, and manages the business.
2. Partnership: An aggregation of owners. Two or more persons contribute their assets to the business and may share the management, responsibility, profits, and losses. Each partner pledges faith in the other partners and stands liable for the actions of all partners within the scope of partnership activities.
3. Limited Partnership: A special form of partnership permitted by state law to have one or more partners whose liability for partnership debts and obligations is limited to their investment in the business. A limited partner is just an investor. If a limited partner participates in management, then liability will exist for all partnership obligations like a general partner. A limited partnership must have at least one general partner who handles the management of the business and who is fully liable for all partnership debts and obligations.
4. Corporation: An artificial being created under state law. A corporation is a separate business entity distinct from its owners, who are called shareholders because they own shares or interests in the corporation. The major characteristic of the corporate form of business organization is this sharp line of distinction between the business and the owners. The corporation is a separate legal entity as well as a separate taxpayer.
5. Tax-Option Corporation: A creation of federal tax law. A corporation in all aspects except that the corporate entity pays no income tax because each shareholder owner reports his or her share of corporate income for income tax purposes on their individual income tax returns. Tax-option corporations are subchapter S corporations.
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