Creating a business is an exciting venture, and choosing a business structure is an integral step. Not only is each business structure taxed differently, but they all offer different levels of protection between personal and business liabilities. Before moving forward on your next step in entrepreneurship, make sure to understand the pros and cons of each business structure and how to protect your assets.
Sole Proprietorship
Owned by a single person and easily established, a sole proprietorship provides no differentiation or protection between the personal and business assets of the owner.
Pros of Sole Proprietorship
Establishing and maintaining a sole proprietorship can be fairly easy to do, as business income is included in the owner’s personal income tax return.2
Cons of Sole Proprietorship
With no protection between personal and business assets, owners become personally liable for their business’s financial obligations.
Best for?
Easy setup and direct control could make a sole proprietorship ideal for small business owners who can afford the financial risks.
Partnership
Similar to a sole proprietorship, though shared amongst two or more individuals, a partnership passes on business profits or losses to each partner, who then report their share onto their personal income tax return.3
Pros of Partnership
Partnerships have many of the same advantages as a sole proprietorship, but risk towards personal assets is now shared.
Cons of Partnership
Ownership of the business and its actions are also shared, limiting individual control of the business.
Best for?
Smaller groups of similar or complementary professionals looking for the advantages of a sole proprietorship, while sharing liability and business direction.
Limited Liability Company (LLC)
As the name suggests, an LLC reduces a business owner's liability by creating a separation between personal and business assets.4 However, an LLC is taxed differently. Owners must pay self-employment taxes to Social Security and Medicare, but profits and losses can become personal income without facing corporate taxes.1
Pros of LLC
Unlike a sole proprietorship or partnership, an LLC provides owners with protection between personal and business assets.
Cons of LLC
Only certain states allow LLCs, limiting the opportunity to create one depending on where your business operates.4
Best for?
Businesses that are looking for similar asset protection to a corporation without the same taxes.
C-Corp
C-Corporations function as their own entity, offer the best personal liability protection to the owner and can raise money through the sale of stocks.1 However, C-Corporations also require more thorough recording and operations procedures, and income can be taxed more than once before reaching a shareholder.1
Pros of C-Corp
Full personal protection, the ability to generate funds through the sale of stocks and potential tax advantages gives C-Corporations the support to operate for years to come.
Cons of C-Corp
C-Corps are taxed on their profits, which can then be taxed again as personal income tax when shareholders receive their dividends, resulting in a double-taxing.1
Best for?
Great for the long-term growth and sustainability of a business, while protecting the owner from personal liability.
S-Corp
Offsetting the often double-tax of C-Corporations, S-Corporations provide the same personal liability protection while operating with their own restrictions.
Pros of S-Corp
Owners can enjoy the liability protection of a C-Corporation without the same double-tax issues.
Cons of S-Corp
S-Corporations are not able to tap into some of the tax advantages of a C-Corporation and are required to have no more than 100 shareholders, all of which must be U.S. citizens.1
Best for?
If the extra requirements are worth it, then businesses can gain most of the benefits of a C-Corporation while avoiding the double-tax issue.
Keeping this information in mind will help you determine the right business structure for you. But remember, this information is not meant to replace the personalized advice and recommendations you may receive when working with a financial advisor or tax professional. Make sure to consult a specialist before moving forward on your business plans.
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
- https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships
- https://www.irs.gov/businesses/partnerships
- https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
