Starting a business? A guide to choosing entity structures

If you're thinking of starting a business, one of the first things you need to consider is what type of entity structure to use. Your choice of entity structure can have a significant impact on your business, including how much you pay in taxes, your personal liability, and how much paperwork you need to file.

There are four main types of entity structures: sole proprietorship, partnership, corporation, and limited liability company (LLC). Each has its own advantages and disadvantages, and the right choice will depend on your specific situation. Here's a guide to the advantages of each type of entity structure and what you should know.

Sole Proprietorship

A sole proprietorship is the simplest and most common type of business structure. It's owned and operated by a single person, and the business and owner are considered the same entity for tax and liability purposes.

One of the main advantages of a sole proprietorship is that it's easy to set up and maintain. You don't need to file any paperwork or pay any fees to create a sole proprietorship. Additionally, you have complete control over the business, and you can make decisions quickly and easily.

Another advantage of a sole proprietorship is that it's the least expensive type of entity structure to maintain. You only have to pay taxes on your business income, and you don't have to pay any corporate income taxes.

However, one of the main disadvantages of a sole proprietorship is that you have unlimited personal liability. This means that if your business is sued or goes bankrupt, your personal assets, including your savings, investments, and even your home, are at risk.

Partnership

A partnership is a business entity that is owned and operated by two or more individuals. Partnerships can be either general partnerships or limited partnerships.

In a general partnership, all partners are personally liable for the business's debts and obligations. This means that if the business is sued or goes bankrupt, the partners' personal assets are at risk.

In a limited partnership, there are two types of partners: general partners and limited partners. General partners are personally liable for the business's debts and obligations, just like in a general partnership. Limited partners, on the other hand, are only liable for the business's debts and obligations to the extent of their investment in the business.

One of the main advantages of a partnership is that it's easy to set up and maintain. You don't need to file any paperwork or pay any fees to create a partnership. Additionally, partnerships can provide access to more resources and expertise, as each partner brings their own skills and experience to the business.

Another advantage of a partnership is that it allows for shared decision-making and profit-sharing. Partners can divide the work and responsibilities among themselves, and profits are distributed among the partners based on their agreed-upon percentages.

However, one of the main disadvantages of a partnership is that disagreements among partners can lead to conflicts and can even result in the dissolution of the business. Additionally, partners are personally liable for the business's debts and obligations, which can be a significant risk.

Corporation

A corporation is a business entity that is separate and distinct from its owners. Corporations can be either C corporations or S corporations.

C corporations are the most common type of corporation. In a C corporation, the business is considered a separate legal entity from its owners, and the owners are called shareholders. Shareholders elect a board of directors to manage the business, and the directors hire officers to run the day-to-day operations of the business.

Corporations are a popular choice for businesses that want to raise capital through the sale of stock or bonds. They also offer the added benefit of limited liability protection for their owners, known as shareholders. This means that shareholders are not personally liable for the debts and liabilities of the corporation.

However, corporations also have their drawbacks. They can be more complex to set up and operate, and they require more formalities such as holding regular meetings and keeping detailed records. They also tend to be more expensive to maintain, as they are subject to double taxation on their profits.

Limited Liability Corporations (LLCs)

LLCs, on the other hand, offer a more flexible and streamlined structure for small businesses. They offer the same limited liability protection as corporations, but without the formalities and complexity. LLCs also have the added benefit of pass-through taxation, which means that the company's profits and losses are passed through to the owners and taxed at the individual level. This can provide tax savings for the owners of the LLC.

One potential drawback of LLCs is that they may not be the best choice for businesses that want to raise capital through the sale of stock. While it is possible for LLCs to issue stock, it can be more difficult and may not be as attractive to investors as the stock of a corporation.

Ultimately, the right entity structure for your business will depend on your specific needs and goals. It's important to consult with a knowledgeable accountant or tax professional to help you make the right decision for your business. They can provide valuable guidance and advice on the advantages and drawbacks of each entity structure and help you choose the one that is best suited for your business.

Making the Right Choice for Your Business

As you can see, there are many factors to consider when deciding whether to start an LLC or another entity type. The right choice will depend on your specific business needs and goals.

If you're unsure of which entity type is best, please consult a professional like the team at www.mar.tax to get started.