Deciding how to structure your business is a process that can ebb and flow as your situation changes and as your business grows. Just because you've already established an entity does not mean it is set in stone. If you are starting a new business, or if you think you might need to restructure, here are a few things to consider.
A sole proprietorship is the most basic type of business, and it is definitely a good way to start. You alone own the company, and you are responsible for all of the company's assets and liabilities. There is no legal separation between you and the company. No formal action needs to be taken when establishing a sole proprietorship, but like all businesses, you will need the appropriate licensing and permits.
It's relatively inexpensive and fairly simple to set up a sole proprietorship. Some advantages are that you have complete control over all aspects of your business, and the tax preparation is not usually very complicated. However, there are a few disadvantages to consider. Because there is no legal distinction between you and your business, you are personally liable for any debt or wrongful actions of the business, including the actions of your employees.
A partnership is a single business where two or more people share ownership, with each partner contributing to all areas of the business, including property, money, labor, and skill. Each partner, in return, shares the profits and losses of the business. Because partnerships involve more than one person, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. Although partnership agreements are not required, they are strongly recommended.
Corporations (also know as a C-corp) are more complex and generally suggested for larger, established companies with multiple employees. It is an independent legal entity owned by shareholders. This means that the corporation itself, not the individuals who own shares of the company (shareholders), is held legally liable for the actions and debts the business incurs.
An S-corp is similar to a C-corp, but you are taxed only on a personal level. What makes the S-corp different from a traditional corporation (C-corp) is that profits and losses can pass through to the personal tax returns of the shareholders. So, the business itself is not taxed, but the owners of the company are taxed.
Another common business entity is a Limited Liability Company, also know as an LLC. An LLC is a sort of legal "mix" between a corporation and a sole proprietorship (or partnership). The LLC provides the limited liability features of a corporation with the the tax efficiency and operational flexibility you enjoy in a sole proprietorship or partnership.
The "owners" of an LLC are referred to as "members," and depending on the state, the members can consist of one person, two or more people, corporations or other LLCs. But, unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses pass through the business to each member. LLC members report profits and losses on their personal tax returns, just like sole proprietors and owners in partnerships.
This post is only meant to give you a brief explanation of the most common types of business entities. There are many legal and tax considerations to discuss before you determine how you would like to structure your business.
For over 14 years, Sonnenburg Consulting has been assisting clients with new business start-up, established business restructuring, and proper business registration. Our team of experienced consultants can help you determine what business structure best suits your needs, and we will help you in every aspect of registering your business to be in full compliance with national, state, and local laws.
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