While there are many types of business entities that cover a wide range of specialized circumstances, there are six most common business structures that owners should consider prior to launching their business. It’s a crucial decision that can have longstanding tax, legal, and financial implications, so it’s important to get expert business entity selection guidance before making a commitment. In this post, we’ll discuss an overview of each to help you understand the major differences.
Often referred to as freelancers, independent contractors, or consultants, this structure does not establish a separate business entity. It is the easiest to form and gives you complete control over the business. Business earnings or losses are filed on personal tax returns by attaching a “Schedule C-Profit or Loss from Business” form. Because the finances of the business are so closely merged with individual finances, the sole proprietor is personally responsible for all business debts and liabilities. This means that if a sole proprietor gets sued, his or her personal assets (such as personal bank accounts, cars, etc.) are at risk.
Similar to a sole proprietorship, a general partnership is simple to establish, doesn’t need to be registered with the state, and doesn’t require corporate formalities, such as bylaws and meeting minutes. Despite having more than one owner, this structure doesn’t establish a separate business entity. Each owner in a general partnership is personally liable for the business profits and losses, including losses that result from a lawsuit.
Unlike a general partnership, a limited partnership establishes a registered business entity, meaning there is paperwork to file with the state. There are two types of partners in a limited partnership. General partners own, operate, and assume liability for the business, while limited partners act solely as investors or “silent partners.” This is beneficial for raising capital because limited partners can invest capital in the business without taking on liability risks.
A C-Corp (also known as a corporation) establishes a separate business entity and is subject to many more regulations and tax laws. Corporations earn profits, are taxed, and are held legally liable as a business entity. The shareholders benefit from the most personal liability protection with this structure, but it does require significantly more extensive record-keeping, operational processes, and reporting. In this circumstance, shareholders are subject to double-taxation – first with the business’s profits and then with the personal income shareholders earn from the business. However, it may aid in raising capital or hiring quality employees because corporations can sell stock or use it as an employment benefit.
Commonly referred to as a “pass-through entity,” an S-Corp offers the liability protections of a C-Corp while allowing shareholders to avoid corporate-level taxation. Like C-Corps, establishing the business entity requires registration with the state, but it also requires a separate filing with the IRS to attain S-Corp status. The record-keeping, reporting, and other corporate formalities are similar to that of a C-Corp.
Limited Liability Company
Often considered the most flexible structure, an LLC allows owners to take advantage benefits associated with both corporation and sole proprietorship/partnership business structures. It protects owners from personal liability, while allowing them to choose whether they prefer to be taxed as a corporation or pass-through entity. Each owner of an LLC is still responsible for self-employment tax contributions towards Medicare and Social Security.
Choosing the business structure that’s right for your business requires an analysis of your unique situation. With over 35 years of experience, Hall & Company’s Accounting and Business Consultants have guided countless companies through the process of establishing the best business entity for their circumstances. Contact us via email or call our offices at: 949-910-HALL (4255).