One of the first decisions to be made when starting any new business is what type of entity is appropriate for your business. There are five common forms of business entities, each of which has its own legal and tax treatment.
Sole Proprietorship – The simplest form of business ownership, a sole proprietorship, is simply the alter-ego business entity of an individual, or in some cases, a married couple. With a sole proprietorship, the owner is legally inseparable from the business for tax and liability purposes. Starting a business as a sole proprietor is easy and inexpensive.
Partnership – A general partnership is also a relatively simple form of business ownership that is created when two or more individuals (other than a married couple conducting business as a sole proprietorship) choose to begin a business together. When forming a partnership, it is imperative to have a valid written agreement that clearly provides for all contingencies, including death or disability of the partners and dissolution of the business. Each partner is responsible for his or her own taxes, but each partner is liable for any and all of the partnership’s debts and obligations.
C Corporation – A special form of business ownership, the C Corporation is an entity where the owners are shareholders, but is run by officers and a board of directors. A C Corporation can be set up as either a nonprofit or a for profit venture. Although complex and with higher startup costs than some other entities, the owners and managers usually enjoy limited liability. C Corporations are generally subject to more regulation than other business entities and the profits are taxed doubly: at both the corporate and shareholder levels.
S Corporation – An S Corporation is structured like a C Corporation but is taxed like a partnership. Rather that the S Corporation paying taxes doubly, only the individual shareholders pay taxes at their level.
Limited Liability Company (LLC) – An LLC, like an S Corporation, can be a highly advantageous entity for a small business as it limits personal liability while retaining the tax advantages enjoyed by partnerships. Nor is an LLC bound by the formalities that govern corporate structure.
As choosing a business structure has significant legal and tax ramifications, it is essential to consider all variables prior to starting any business venture. We recommend that you consult an attorney to determine which structure is best. The Law Offices of Aaron J. Stewart would be happy to discuss your various options with you. Please contact us at firstname.lastname@example.org!