There are four main types of business entities you can choose from: sole proprietorship, partnership, corporation, and limited liability company (“LLC”). In determining which entity is best for you, there are numerous things you should consider, such as, legal liability, tax implications, cost of formation and ongoing administration, flexibility, and future needs. There are advantages and disadvantages to each.
A sole proprietorship is common for individual business owners because it is simple to form and gives the owner complete flexibility and control over the business. However, there are certain risks associated with sole proprietorships because it does not form a separate legal entity. This means that your business assets and liabilities are not separate from your personal assets and liabilities, so in turn, you can be held personally liable for the debts and obligations of your business. A sole proprietorship can be a good choice for low-risk businesses.
A partnership is a simple structure for two or more people to own a business together. These “partners” agree to share in the profits and losses of the business. There are risks associated with partnerships, one being that one partner can be held responsible for the actions of other partners, which means that each partner is personally liable for the financial obligations of the business. These risks make partnerships the least desirable type of business entity. However, it is important to note that the partnership entity can be broken down into limited partnerships and limited liability partnerships, which create some safeguards regarding certain liabilities.
When forming a corporation, you are forming a separate legal entity that is created to conduct business. This means that the corporation itself can be taxed and held legally liable for its actions. A corporation can be formed by one or multiple people. A corporation provides a liability shield which makes it particularly desirable for individuals who have a significant amount of personal assets that would be vulnerable to business difficulties or lawsuits. While the avoidance of personal liability is one of the greatest advantages to forming a corporation, the necessary record-keeping that is required could be seen as a disadvantage for some. When forming a corporation, you can also consider the differences between an S-Corporation and a C-Corporation when it comes to business taxes.
Finally, the last type of business entity is a limited liability company or an LLC. LLCs are gaining popularity because it is a hybrid entity that pulls certain advantages from both that of a corporation and a partnership. LLCs provide limited liability and ease of ownership for multiple individuals. Like corporations, LLCs can engage in elections that allow for the income or loss of the particular business to be reported on an individual’s tax return, resulting in the benefit of lower tax rates. Forming an LLC is also a good option for those looking to protect their personal assets because it shields owners from personal liability.
You should always speak with someone, an attorney or accountant, before developing your particular entity to operate your business. These discussions can ensure you understand what is best for your particular needs.