BUSINESS STRUCTURES

Before you make a decision to buy a business or start your own business you will also want to think about which business structure (or legal business entity) your business will use. Your business structure will determine which types of income tax returns you’ll have to file as well as other legal, financing, and tax considerations. Each business structure has its advantages and disadvantages; it is important you review them carefully so you make the best decision. It is always a good idea to consult with a CPA (Certified Public Accountant) an attorney, or a financial expert.

The following is an overview of the most common types of business structures.

Sole Proprietorship

 A sole proprietorship is a business that is owned by one individual. As a sole proprietor, you’ll have total control and ownership of the business. A sole proprietorship is the simplest form of business organization to start and maintain, which is why most new small businesses use this business structure.

Under a sole proprietorship, the business’ liabilities are your liabilities. In other words, you assume all the risks of the business. You’re personally liable for all business debt, and the liability is not limited to the value of the business. This means your personal assets are at risk.

While a sole proprietorship is simple and inexpensive to form, you are still subject to some fees that all businesses must pay such as business licenses, sales tax, and other local and state fees and taxes.

Advantages of a sole proprietorship:

  • Simple & inexpensive to form
  • You have total ownership & control
  • There is no “double taxation”
  • Minimal record keeping other than for tax purposes

 

Disadvantages of a sole proprietorship:

  • All of your personal & business assets can be risk
  • Often difficult to obtain business loans
  • A sole proprietorship is limited to one owner

 

LLC

 A Limited Liability Company (LLC) is a popular business structure. LLC’s have the tax benefits of a partnership, and the limited liability benefits of a corporation.

Limited Liability Companies are formed by completing and submitting the required documentation (Articles of Incorporation), and paying the required fees. The owners of an LLC are called “members” and there usually can be only one managing member. In most states, members may include individuals, corporations, and other LLCs.

Advantages of a LLC:

  • Limited Liability – if the debts of the company exceed its assets, the creditors cannot come after your personal assets.
  • There is no “double taxation” – profits & losses of the business are not taxed at both the LLC level & personal level like a Corporation is. With a LLC, profits & losses pass through to the owner’s tax return, and are only taxed once.
  • Less record keeping – you don’t have to hold shareholder and director meetings.
  • More than one class of stock is permitted.

 

Disadvantages of a LLC:

  • A lot of paperwork, and more complex and expensive to setup; legal assistance may be required.
  • Limited Life – an LLC is dissolved when a member dies or leaves. However, this can be amended in the operating agreement.
  • Recurring annual fees
  • The LLC is a somewhat newer entity and customers are not as familiar with it as they are a corporation. There might be a perception among some customers that a business name with “Inc.” at the end is more professional and stable than an LLC.

 

C Corporation

 The C corporation is a taxable entity which exists separately from its owners. The corporation’s profits are taxed at two levels: the corporation level, and the personal level. This is called “double taxation.” In other words, the profit is taxed to the corporation when it’s earned, and then taxed again to the shareholders when the profit is distributed as dividends.

One advantage of a corporation is that the owners (shareholders) of the corporation have limited liability. This means that the owners are not personally liable for the corporation’s obligations; they only risk what they have invested in the business.

Incorporating your business will usually make it easier to establish credit from suppliers and receive loans from banks.

Advantages of a C Corporation:

  • Limited Liability – if the debts of the company exceed its assets, the creditors cannot come after your personal assets.
  • Generally easier to establish credit and obtain loans; and required if you consider doing a 401K or IRA rollover program.
  • Corporations do not dissolve upon death of an owner (stockholder) or if ownership changes.

 

Disadvantages of a C Corporation:

  • Double taxation
  • Recurring annual corporate fees
  • They are more expensive to create than a partnership or a sole proprietorship.

 

S Corporation

 Any eligible corporation located in the United States can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S Corporation.

Advantages of an S Corporation:

  • Liability of the owners is limited to their investments.
  • There is no double taxation as with a regular C corporation.

 

Disadvantages of an S Corporation:

  • They are more expensive to create than a sole proprietorship or partnership.
  • Only smaller companies may acquire S Corporation status. Can only have a limited number of shareholders.