Which Business Entity Is Right for You?

Your chosen business structure can greatly influence the shape of your company and its future success. How do you know which entity is right for you? It’s a big decision, but in some cases your business entity chooses itself. You just have to get acquainted with the facts and see which structure best matches your current business needs, as well as your goals and aspirations down the road.

Sole Proprietorship

A sole proprietorship is the most common form of business entity, and it’s also the easiest to form. Aside from getting the necessary licenses and permits, this status is formed automatically from your business activities. As a sole proprietor, you would be the one person responsible for your company’s liability, profits, and losses. That means any income and losses from your business go through your personal income tax because you and the business are considered one entity. For that reason, you also place greater risk on your personal assets.

Best Suited For: Individual business owners who want to keep things simple. Aside from having full control over the workings of your business, you’ll also benefit from the relative simplicity of registering your business, operating it, and paying taxes. On the other hand, it can be more difficult to raise funds, because you’re relying on your personal credit and assets.

Partnership

When two or more partners share ownership of a single business, it’s called a partnership. This entity can look different depending on its structure (general, limited, or joint venture) and the terms of your partnership agreement. As in a sole proprietorship, partners will also declare their share of business profits as personal income, and they will share personal liability in the case of lawsuits or debts.

Best Suited For: Anyone who wants to share liability, profits and expenses, management, and ownership duties with another trusted person or people. With a strong partnership agreement, you can clearly define each owner’s responsibilities and control over business decisions. It’s also relatively easy and inexpensive to form.

LLC

Members of a limited liability company (LLC) have many of the same tax and operational flexibility advantages as a partnership. They are able to distribute profits as they see fit. As its name suggests, an LLC limits the personal liabilities of owners, partners, or shareholders because it exists as its own separate, hybrid legal entity.

Best Suited For: Business owners who prefer a greater degree of control and flexibility while avoiding double taxation. An LLC lets you separate your personal assets and liabilities from those of the company, although you may face issues raising capital in this way. It also offers less record keeping and lower startup costs compared to corporations.

Corporation

Corporations are generally considered to be the largest and most complex form of business entity. As a separate legal entity, your corporation can sue, own property, and sell stocks independently of its owners—and file its own tax return. That means you may be taxed twice, for both your company’s profits and your share of dividends. Keep in mind that corporations come in multiple forms (like S, C, and B corporations), and they all have major differences between them.

Best Suited For: Large, established companies with many employees, in the case of C-corps. C corporations often have the best chances with funding sources like bank loans, investor or venture capital, and the option to sell stock shares for extra funds. Your ability to offer stock options and benefits may also be attractive to potential employees of a higher quality. If you go this route, make sure you can handle the costs, the paperwork and reporting requirements, and the double taxation.

Alternatively: If you own a small business and are interested in the corporate format, you may elect to be treated as an S corporation by the IRS. It’s a similar structure, except you avoid double taxation. That means you’ll only be taxed on a personal level. If you choose this route, you’ll have to observe certain financial rules specific to the S-corp (along with other strict operational requirements), but you may also be able to take advantage of business expense tax credits and other savings. Moreover, your business will operate independently, offering greater protection for its shareholders.

There are plenty more details and nuances to understand before you actually form your new business entity, but it’s worth taking the time to reflect on your options. A knowledgeable business lawyer can streamline the process for you and help you make the right decision. Contact Calevoso Law to speak with a dedicated attorney who will thoroughly analyze your situation, answer your questions, and provide you with the best possible choices to ensure your continued success. We will work closely with you to ensure you are 100% confident in your next move.

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Written by CALEVOSO LAW