From C and S corporations to sole proprietorship and LLC, the choice options for your business’s entity may seem endless, and there are certainly many factors to consider before making this important decision. Thus, we’d like to share a few specific aspects of your business to consider before you decide on an official entity.
The most common types of incorporations are Limited Liability Companies (LLCs), S Corporations (S Corps) and C Corporations (C Corps). Several differences exist between the three, but let’s start with how they are similar: incorporating your business, regardless of which choice you make, gives you protection against your business’s liabilities and keeps you from being personally sued for your business’s actions. As explained in this article, “It becomes a legal business entity of its own — separate from the individuals who founded it.”
The differences between types of incorporations revolve around the structure of your business and how it will be taxed. More on this below…
Who Will Own the Business?
A Sole Owner or Partners
A sole proprietorship, general partnership or limited partnership allows for one or two owners. With these business entities, the ownership and management decisions are the responsibility of either the sole proprietor or the determined partners.
If you’ve decided that shareholders should own your business, a C or S corporation entity may be best for you. Each option opens the door to shareholders, and an appointed board of directors makes management decisions.
In an LLC, owners are referred to as “members” and can consist of individual people, corporations or other LLCs. There is no limit to the number of members, and members themselves make management decisions rather than a board of directors.
Who Will Hold Liability?
Sole proprietors and partners are held personally responsible for any debts and other liabilities the company may have.
In an LLC, C corporation or S corporation, owners are not held personally liable. Instead, debts and other liabilities are paid directly from the company’s assets.
Startup and Administration
If the cost of startup and the amount of administrative paperwork are a deciding factor for your business, a sole proprietorship or partnership will be beneficial. Start-up costs are relatively low and, because of limited owners, paperwork is minimal. Corporations can prove to be costly at startup and there is quite a bit of paperwork to deal with because of the corporation status.
While the structure of the business needs to be taken into consideration, the biggest differences are in how each incorporation is taxed. Both LLC and S Corps are called “pass through entities.” This means that the business owner files his or her business income and losses on an individual tax return. At the same time, LLC business owners are required to pay self-employment tax, and S Corp business owners are not.
Double taxation occurs when both corporations and their shareholders are taxed individually for the same income. To avoid this, choose an S corporation structure, which does not account for shareholders.
There are many other aspects to consider before making the ultimate decision on your business entity, and it’s important to look at every angle.
Check out our scannable chart comparing different entities to find out more about how this decision can affect your business.