Deciding on the best business structure for your new company can be confusing. There are many factors to consider and you face a tough choice about which structure will be most beneficial for long-term success.
Here’s a look at the types of business structures to consider:
A Sole Proprietorship links the individual owner and the business for tax and liability purposes. It’s usually the easiest to set up and allows you to be taxed only once, but there are limitations to this type of business. If someone sues your company, they also able to sue you as the owner, putting your personal assets at risk. Also, the business dissolves upon the owner’s death and cannot be transferred or sold.
A Partnership involves more than one person. The owners usually draft a partnership agreement that outlines their individual responsibilities and how money will be distributed. There are tax advantages but (similar to Sole Proprietorship) owners may have personal liability.
A Limited Liability Company (LLC) combines some benefits of a corporation with some benefits of Sole Proprietorship or Partnership. Your company is not taxed twice as is the case with a C Corporation (see below) but you also don’t carry as much potential liability as in a Sole Proprietorship or Partnership. An LLC is dissolved when a member (owner) leaves, and members are required to pay their own Medicare and Social Security contributions.
Corporations are separate legal entities that separate the owner’s personal assets from the company.
A C-Corporation is the traditional structure for a corporation and means that the business is taxed separately from the owners.
An S-Corporation is a distinction made by the IRS which adds the potential to avoid double taxation to a traditional corporation. This means that the corporation is not taxed, only the owners.
The chart below provides a comparison of each business structure. Before you commit to a business structure, consult tax and legal professionals who can provide guidance for your unique situation.