Types of Business Entities

Choosing which type of business is right for you depends on a number of factors individual to each business. Each type of business structure has its own advantages and disadvantages. Continue reading below to learn more and make an informed decision. Or, chat with one of our planning consultants who will gladly help you figure out the best choice.

Sole Proprietorship

Pros:

• Cheap, and easy to form
• Simpler tax preparation
• Complete control

Cons:

• Personal liability
• Difficult to raise money

As its name suggests, this type of business is owned and run by a single individual, and it does not legally separate the owner from the business. It does not form a new and separate business entity as an LLC or Corporation does. But it is the simplest form of business and requires no formal action to organize. All it takes is conducting business activities with a single owner, and you have a sole proprietorship. In fact – you may technically have one already. Keep in mind that you may still need to obtain any necessary licenses or permits. The sole proprietorship does not protect your personal liability, meaning that the business' liabilities can be transferred over to the owner or sole proprietor.

Limited Liability Company (LLC)

Pros:

• Limited Liability
• Operational Ease
• Profit Sharing

Cons:

• Self-employment taxes
• Control

An LLC allows you to remove your personal liability from your business. As such, it is more complicated than a sole proprietorship and requires filing Articles of Organization with your state department, which requires a fee. LLC rules and regulations vary by state, so we recommend you do further research for your particular state. In terms of business structures, LLC’s are relatively simple to form and are a good way to reduce your personal liability or raise money. However, the LLC is not taxed as a separate entity. Also, if you will have multiple owners or stakeholders, it is important to have everything clearly documented and contracted from the start (e.g. operating agreements, profit sharing, decision making, etc.)

Corporation

Pros:

• Limited Liability
• Stock offerings (capital + attract better employees)
• Separate Corporate Tax Rates

Cons:

• Complicated, costly, and time-consuming start-up costs
• Double taxation

Also known as a C corporation, this business structure is its own independent legal entity collectively owned by its shareholders. A corporation is usually the best for larger companies due to the costly and time-consuming start-up process. However, corporations make it much easier to raise capital through stock offerings, and to attract employees with benefits such as partial stock ownership.

S Corporation

Pros:

• Tax benefits & credits
• Separate entity

Cons:

• Stricter Requirements

S Corporations can be exempt from the double taxation that C Corporations are subject to. This is the biggest difference and advantage of the S Corporation over the C Corporation. The business itself is not taxed, but employed shareholders are required to be paid reasonable compensation, which is taxable. Like C corporations, S corporations are considered “considered by law to be a unique entity, separate and apart from those who own it” by the IRS. Thus, personal liability of the owners/shareholders is limited.

Partnership

Pros:

• Easy and low cost
• Equally shared commitment
• Partnership incentives

Cons:

• Personal Liability
• Potential Conflicts
• Shared Profits

Partnerships are similar to sole proprietorships in that the partners' personal liability can be at risk. However, a partnership can have more than one proprietor or owner. Equity, investment, decision making power, and all other aspects of the business are divided amongst the partners as set forth in a partnership agreement. Since your partners will have significant impact on yourself and the business, it is important to have a partnership agreement that clearly dictates how the partnership will work. It is also extremely important to pick your partners carefully as you will have to work together, and it may be difficult to change partners later.