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Discover What Types of Business Entities Will Maximize Your Business Success...
By choosing the right business entity for you, you increase your chance for success. So...which entity is best for you? Types of Business EntitiesGenerally, legal and tax considerations determine your selection from the different types of business entities. Which income tax return form you have to file. How much liability you are risking. Directly affects your ability to obtain and build true business credit.Sole proprietorships, partnerships, "C" or "S" corporations and limited liability companies or LLC's are the most common types of business entities. Sole Proprietorship
A common entity that many new small businesses start out with is a sole proprietorship. Generally act like it sounds. A business entity owned and operated by an individual. The business and the owner are legally considered one the same.The assets and profits belong to the owner. But so are the debts...The owner is responsible for all the debts and liabilities. The IRS does allow an exception for sole proprietorships to include a husband and wife partnership. They must of realized what marriage is about. Since you're liable for your partners debts and liabilities anyway, why make it harder writing up a partnership agreement... It's All YoursYou can focus on making money with a minimum of administrative issues. Inexpensive and easy to get up and running. Other than the usual licensing fees, it might not cost anything to start. The assets and profits belong to the owner. Easy to dissolve.Sole proprietorships may have a difficult time raising money from investors who typically want to make sure that they would not be held liable as well. Partnerships
A partnership is similar to a sole proprietorship except the business is owned by two or more people. The business and the partners are legally considered one and the same.There are two types of partnerships. A General Partnership which divides everything equally. Management. Profits. Losses. A Limited Partnership limits at least one of the partners liability to the to extent of their investment. They are also limited in their participation in the management of the partnership. Achieve an AgreementFor your partnership, you would have an agreement similar to the operating agreement of an LLC and the by-laws of a corporation including:
Partnerships are easily established. Profits and losses are included in the partners' personal tax returns. All partners are jointly and individually liable for the business and actions of the other partners. All partners are personally liable for the debts and liabilities of the business. The Limits
LLCs or Limited Liability Corporation's provide the advantages of partnerships. Providing the profits directly to the partners. With the added benefit of limiting liability for the debts and liabilities of the business. Can be owned by non-u.s. residents and other LLC's and "C" or "S" Corporations. Unlimited number of members. LLC owners can choose to tax the LLC as a sole proprietorship, partnership, "C", or "S" corporation. This election is made through the IRS after the company forms with the state. Corporation
When you file for a corporation, you must designate if you elect the option of a "S" corporation within 75 days of filing. "C" or "S" corporations have many similarities. An S corporation is operated in the same manor as a C corporation and must follow the same corporate formalities as a C corporation. Can still exist even if the owner leaves. A "C" or "S" corporation can be taxed, sued, and can enter into contracts.C CorpThe most important advantage of a corporate structure is that it is generally organized under state law and generally treated as a separate, individual entity for tax and liability purposes. As a whole "new" person.Limited liability for directors, officers, shareholders, and employees. Investors easily purchase shares of stock. Can issue common and/or preferred stock. No limit to the number of stockholders. Owners don't have to be U.S. citizens. Continues of owner leaves. Can deduct ordinary business expense and benefits to employees. A "C" corporation can enter into contracts, be taxed, and sued. The owners or shareholders, elect a board of directors to oversee the policies of the corporation. Elect the officers who run the day-to-day operations. In a small corporation, the board of directors and the officers are typically the same people. A "C" corporation must maintain formal minutes, corporate resolutions, etc. Profits and salaries being paid out to employees and shareholders. “C” corporations are considered double taxation entities since the employees and shareholders have to pay taxes on the distributions they receive after the corporations taxes are paid. S CorpAn “S” corporation is an answer to double taxation. Acts as a pass through tax structure. The “S” corporation files a tax return as a informational tax return only. The shareholders report financial information and pay any taxes due.This option is only available to small business corporations that are domestically formed. Have no more than 100 shareholders and all must unanimously agree to the option. The shareholders cannot be other businesses,or a non-resident alien. May only have one class of stock. You Decide
Now that you have a basic understanding of the different types of business entities, you can decide what the best entity for your business.Sign up for our Free Newsletter providing valuable information and ideas for you and your business. Giving you and your business a solid foundation.
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