When starting a new business you have to establish which legal structure is best for your present and future needs. Each has advantages and disadvantages regarding legal and tax aspects, and in some cases the decision could be automatic. These are the most common types of business entities you can choose from:
Sole Proprietorship, also called a DBA or “Doing Business As”, is the most common form of business entity, primarily because the legal requirements are minimal, it is easy to create and manage and the owner has complete control over it. If there is more than one owner then the Sole Proprietorship becomes a Partnership. A downside to this is the fact that the owner assumes the entire responsibility, or becomes personally liable regarding all legal aspects. This includes tax returns, debt, profits and loses. The risk is high because all personal proprieties are directly connected to the business.
Partnership involves two ore more associates who share the profit, loss and debt of a business. Each partner is personally liable for taxes, but they do not pay income taxes. Instead they file an annual report about the return information that includes gains, losses, credits, deductions and other business activity, divided by a previously agreement between partners.
C Corporation, or a Regular Corporation is one of the types of business entities that separates the founder or founders from the legal responsibilities related to the organization. This offers protection for the owners in case of debt or bankruptcy, holding only the corporation liable for it’s activity. The taxation is also a separate entity, but there is a downside to it: it can be taxed again when dividends are distributed to the shareholders. Although it is the most successful entity, it requires more paperwork than an LLC and it costs more than a DBA to get it started.
The C Corporation double tax can be avoided by creating a similar corporation, the S Corporation. The tax system is more similar to the Partnership, passing the profits and loses to the shareholders for tax return so the corporation does not pay taxes as an entity. There are some things you should keep in mind when choosing the S Corporation: it can have a maximum of 100 allowable shareholders, one class of stock and it has to be a domestic corporation.
Limited liability company (LLC) is a mixture between the Corporate ans Partnership entities that includes the benefits of both. Owners of a LLC are called members. There can be an unlimited number of members ,or just one consisting of individuals, corporations or other LLCs. Losses and profits are passed through members tax returns while having no liable responsibility. Banks and insurance companies do not qualify for this type of entity so you need to check your status before deciding for a LLC. This form of business entity is quite popular although forming it is more expensive than a DBA.
All types of business entities have pros and cons so deciding which one is best for your is not an easy task. Selecting the right entity can spare you a great amount of time, money, and liabilities you have to deal with. If you find yourself in difficulty, it would be wise to consult a professional for advice.