North Carolina Economic Development Commission Small Business Resource Guide Legal Status Businesses can be operated under several different legal structures, which affect the financial responsibility of each owner, the ability to dissolve a business, and the manner in which taxes are paid. Operating as a sole proprietorship is the simplest legal structure for a one-owner firm. In this type of arrangement, the business is not legally distinct from the owner. Taxable income from the business is included with any other personal income of the owner, and reported on a standard IRS Form 1040.
Sole proprietors are, however, personally liable for any debts from the business.
In a partnership arrangement, as with a sole proprietorship, the business is not legally separate from the owners. Under partnership status, business profits or losses are distributed to each partner in proportion to their percentage of ownership. Taxes are paid by the individual owners. All partners are personally liable for business debts and decisions, even for business actions taken by other partners. Partnerships are dissolved when any owner terminates his or her membership, dies, or is declared insane, or in circumstances of bankruptcy.