Which Business Structure is Right for You?
Corporation (C Corporation)
A Corporation is a legal entity composed of one or more shareholders and have a board of directors who help manage the company. Corporations can issue stocks or bonds which helps to generate capital and investment opportunities. In this structure, the business is held responsible for the actions and debts it incurs instead of the individuals who own or work for the company.
Advantages:
• Limited liability
• Ability to generate capital through stocks
• Corporate tax advantage
• Attracts employees due to company benefits.
Disadvantages:
• Costly administrative fees
• Complicated tax and legal requirements
• Double taxation
• More paperwork
Limited Liability Company
Limited Liability Companies combine features of both a partnership and corporation. An LLC offers flexibility in regards to cost and profit sharing arrangements. The organization of the business can consist of one person or several individuals. LLC’s are taxed similarly to Partnerships as the profits and losses are passed through to the owners. Each member just reports thebusiness gains and losses on their federal tax return.
To incorporate an LLC, you must:
1. Choose a business name
2. File Articles of Incorporation
3. Create an operating agreement (optional but suggested if there is more than one owner)
4. Obtain the necessary licenses and permits
Advantages:
• Limited Liability
• Less registration paperwork
• Flexibility profit sharing
Disadvantages:
• Limited Life (the business dissolves when a member leaves or passes away)
• Self-employment taxes
Partnership
A partnership occurs when two or more owners make decisions for the business. The losses, liability, and profit is shared among all of the stakeholders involved. When creating a partnership, it is important to discuss beforehand the responsibilities of each partner in a partnership agreement. Establishing a protocol lessens the chance of conflict in the future. Other things your contract should include is how to conduct business matters, the decision-making process, and how profits or investments will be distributed.
Types of Partnerships:
• General Partnerships-the profits, liability, and management are divided equally among each partner.
• Limited Partnership-this type still allows partners to have limited liability but also means they have limited input in regards to management decisions. The percentage each partner invests in the business determines their stake in the company.
• Joint Ventures-managed like a general partnership however for just a limited period or a single project.
Advantages:
• Simple to form and inexpensive to operate.
• Shared responsibility
• Shared financial commitment
• Combined skills and expertise
Disadvantages:
• Joint and individual liability
• Potential disagreements
• Shared profits
Individuals in a partnership must file an annual return to report income, deductions, gains and loses. However, the business itself does not pay income tax.
Subchapter Corporation (S Corporation)
An S Corporation is a unique type of corporation that limits the number of stockholders to seventy-five members. Like a regular corporation, this business type can issue stock. However, it can only be issued through one class. An S Corporation is attractive because it is just taxed once through the personal income of the owners.
Advantages:
• Tax savings-avoids employment tax.
• Tax credits
Disadvantages:
Stricter operational requirements
Shareholder compensation requirements
Sole Proprietorship
A Sole Proprietorship is owned and operated by one person who is responsible for the assets and liabilities of the company. If a lawsuit arises from any conflict such as accidents, faulty merchandise, or other issues, the owner is solely liable and can lose personal possessions. Like with all business forms you should obtain the necessary license or permit. When registering your business, you have the option to operate under an assumed name, trade name, or "Doing Business As (DBA)" name as long as the name cannot be claimed by another company. To report your taxes to the IRS, a business in this category will use the Schedule C application that transfers to your tax return and the 1040 Form.
Advantages:
• Easy to form
• Ability to control your business
• Easy tax preparation
Disadvantages:
• Personal liability may arise
• Harder to raise capital and funding
• Burden of business solely on business owner
Once you have decided on the business structure that is right for you, research what types of licenses or contracts you need to legalize your business. A great starting place is contacting your Secretary of State's Office or relevant entity.
