The business entity you choose has a lot riding on it. The business structure you choose affects your tax obligations, legal liability to the owner, growth potential, and the compliance requirements you need to meet for you to run your business. As your business grows, the business entity type may not be ideal. For you to prepare for a discussion with the professional advisers here are some of the popular business entity types.
General partnership and sole proprietorship.
Most businesses start as sole proprietorships where there is one owner or a couple. In other circumstances, you can find a general partnership where there are multiple owners. If you fail to register your company with the state, you are by default considered either a general partnership or a sole proprietorship. You cannot separate the business from its owners legally or financially in a business that is not registered.
Advantages of general partnerships and sole proprietorship.
• Setting up a business is straightforward and not expensive. When registering this type of business, you did not have to follow a strict formation of paperwork. After filling in the DBA, you can advertise your business under a name that does not include either the first or last name, and the paperwork is minimal. When registering the business, the compliance documentation is not difficult to fill.
• Simple tax. Filing the business profits and losses goes through the owner’s tax returns; this makes it easy to file tax returns.
Disadvantages of general partnerships and sole proprietorships.
• Personal liability risks. If the business is sold for failure to pay bills, the owner is responsible. You can lose your assets to satisfy the debts and lawsuits.
• You can burden yourself with self-employment tax. All the business income is taxable in a general partnership or a sole proprietorship. This means that the business can be scrutinized and can be subjected to Medicare and social security taxes.
• You limit your opportunity to grow. Business investors do not fund businesses that have not been registered as a corporation or LLCs.
Limited liability Company.
This is described as a cross between a corporation, a partnership, or a sole proprietorship. The LLC is considered a separate legal entity from that of its members.
Advantages of LLCs.
• Owners are faced with limited liability. This is because there is a legal separation between the members of the LLC and the business. Personal assets are protected if the business faces any financial or legal debts.
• Flexible tax. LLCs get pass-through taxation where the business income and losses can be reported on the personal tax returns. Some eligible LLC companies can choose taxation through an S corporation.
• Flexible management. An LLC company with many members can choose to either be a manager-managed or a member-managed entity.
Disadvantages of LLCs
• Self-employment tax burden. All the business profits you make can be taxed like, in general partnerships and sole proprietorships.
• Limited lifespan. If a member leaves the company, then the LLC operating agreement ceases.
• Limitations in growth opportunities. An LLC cannot raise capital through the stock.
C Corporations.
A C corporation is a separate legal entity and taxpayer from its owners. The business expenses and income are linked to the corporate entity reports and the business that pays the taxes.
Advantages of c corporations.
• Legal protection for its owners. The corporation structure offers liability protection for its owners. In most circumstances, the directors, shareholders, and employees are protected from death and lawsuits of The corporation.
• Growth potential. C corporations can issue multiple stock classes. Many investors are likely to invest in a c corporation type of business entity.
• Tax flexibility. This entails the types of business entities can choose to be text as an S corporation.
• Perpetual life. You can transfer ownership interest to others in this type of corporation. Shareholders can sell, bequeath, or give to their share of the company.
Disadvantages of corporations.
• Corporations are taxed at the federal level. After that, they can also be taxed if the profits are distributed as dividends.
• Compliance cost and complexity. It is hard to list the company as a C corporation. You have to appoint a board of directors, file an initial report, draft bylaws, and file annual reports.