Your business entity can be one of the most valuable decisions that you make in creating and continuing a business. It’s insanely critical to wisely choose the entity that's best for your business, make changes when necessary, and take advantage of the benefits of your business structure.
To simplify your choice of business structure, first ask yourself a few basic questions:
What’s your tolerance for risk to personal assets?
How do you want the IRS to tax your business profits?
How formal do you want your management structure to be?
How much administrative complexity can you handle?
What are your long-term goals for the business?
Use the answers from the above questions as a guide when reviewing the different types of structures below.
Sole Proprietor
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them.
All profits are recognized as your own and filed under your personal tax return.
Partnership
A partnership is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited partners.
Limited Liability Company
Limited liability companies (LLCs) in the USA, are hybrid forms of business that have characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is not considered a corporation.
Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation.
This is more popular with real estate investors due to the protection it provides.
S Corporation
An S corporation has one class of stock and no more than 100 shareholders, none of whom can be another for-profit business or a person without a green card who doesn’t meet IRS residency requirements.
Profits are taxed on shareholders’ tax returns and are not subject to Self-Employment tax, and shareholders have limited liability.
Most small-business owners with operational businesses should at some point consider organizing their ventures as an S corporation.
C Corporation
A corporation whose profit is taxed once on the business level and a second time on an individual basis when earnings are distributed to shareholders, who have limited liability for the business’s debts.
C corporations can have multiple classes of stock and an unlimited number of shareholders.
Almost every Fortune 500 company is set up as a C corp, and they have specific reasons for doing so, such as raising capital and abiding by securities laws in order to go public.
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