A sole proprietorship is generally an unincorporated business owned by one individual. In a partnership, two or more persons carry on a business under an agreement and applicable law. A corporation is a legal entity separate from its owners. Shareholders own interests in the corporation, not direct shares of each asset the corporation owns.
A limited liability company (LLC) is formed under state law. Its federal tax classification can depend on its owners and elections. Legal form and tax classification therefore need to be checked separately.
The accounting reporting entity is another question. Consolidated financial statements may include several legal companies under the applicable accounting requirements. Legal form alone does not establish which companies belong in those reports.
For introductory comparisons, identify the form and the owners' relationship to the business. Specific liability and tax conclusions require the governing law and facts; the label alone is not enough to settle them.
Put the concept to work
Understand this concept
- Distinguish a sole proprietorship, partnership, and corporation and explain why legal form, federal tax classification, and the accounting reporting boundary are not interchangeable.
Learning resources
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Build on these ideas
- Reporting entity — Understand
To understand this concept: Helpful. A legal organization and the set of activities represented in a report can overlap without being identical.