One of the most important choices that you will make when starting a business is the type of legal structure you select for your company. Should your business be a proprietorship, partnership, limited partnership, C corporation, S corporation, or LLC? This is an important question to ask yourself. There will be legal and tax implications involved when choosing the entity for your business. Seeking counsel from legal or business experts is advised, as this decision is not to be taken lightly.
Keep in mind that your entity choice is not a permanent decision. Your business entity may change as the business evolves through its stages of growth. This resource is intended to give a brief overview of the entity types that are available for your business in the stage that it is currently in.
A sole proprietorship is the simplest and most common structure chosen to start a business. The person who owns the business is solely responsible for its assets, debts, and pays personal income tax on earned profits. This structure is popular among individual self-contractors, consultants, or small business owners.
Limited Liability Company
An LLC, or limited liability company, is one of the most flexible business structures. This type of entity allows you to choose how profits are distributed, who manages the business affairs, and how the profits will be taxed. An LLC is designed to separate the business owner’s personal assets from the LLC’s debts and liabilities. There are many advantages to structuring your business as an LLC. You will have personal and business liability protection, no ownership or management restrictions, flexible tax status, no separate tax returns or double taxation, and flexible profit distribution.
Cooperatives are typically non-profit organizations or businesses that are owned and managed by the people who work there or use their services. Co-ops exist to meet the member needs, not on bringing a return to the investors. Members enjoy tax advantage that give them the opportunity to contribute to the economic stability of their communities.
A partnership is a business that is owned and operated by several individuals that have not filed papers with the state to become a corporation or LLC. The partnership is the simplest and least expensive co-owned business structure to build and maintain. There are two types of partnership entities: General partnerships and limited partnerships. A general partnership is an association of two or more people that are running a business to earn a profit. Limited partners do not have an active role in the business. The limited partner will contribute financially to the business, but has limited control on the business decisions and daily operations.
A Corporation is a more complex business structure that is suggested for larger, more established companies. Corporations may be formed for profit or nonprofit purposes. A typical Corporation structure consists of three main groups: shareholders, directors, and officers.
Shareholders own the business, the Board of Directors select officers and make high level decisions, while Officers run the day to day activities of the business.
C corporations are the most common type of Corporations in the U.S. Unlike other business structures, C corps are taxable entities and offer limited liability protection. They offer unlimited growth potential through the sale of stocks and there is no limit to the number of shareholders a C corporation can have.
The S corporation tends to be one of the most attractive entities among small-business owners. An S corporation has appealing tax benefits and still provides business owners with the liability protection of a C corporation. S Corporations are great for businesses that provide a service; will not have significant start-up costs; will not need to make major equipment purchases before beginning operations; and will make a substantial amount of money without a putting in a lot of effort or acquire big expenses.
Whatever structure you decide to proceed with, you must know that there will be pros and cons to every entity type. It’s important to understand what model suits you based on the status of your business. There are many great resources that will help you make this process as painless as possible. One to consider is Legal Zoom, which offers personalized services in all 50 states and approved by top attorneys nationwide.
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