Business structures vary in their respective levels of ownership, applicable taxes, and scalability. Before making a commitment to a business structure, it is a good idea to consult with your accountant to determine what business structure will be most advantageous to you. Here is a breakdown of the five most commonly witnessed business structures.
One person owns the business and is not required to register with the state. In Sole Proprietorship, you are personally liable for the profits and losses your business endures. This includes bankruptcy or any legal action taken against your business. There is also a personal obligation to pay income tax and self-employment taxes on the total income your business. Taxes for Sole Proprietorship are included in your personal taxes.
A General Partnership is easy to form and easy to dissolve. It is recommended to have a legal partnership agreement, which shows the rights and responsibilities of each partner. The disadvantage in a General Partnership is that the partners face unlimited amount of liability. It is affordable to form a general partnership. However, General Partnerships are not protected from lawsuits against the business and may allow their personal assets to be taken away. One may be liable for the other partner's actions toward the company.
A limited amount of liability exists for an S Corporation. On your personal tax return, you will disclose your share of profit or losses. Taxes are filed annually, and the income is not taxed twice. An S Corporation will attract investors by selling shares of stock to a limit of 100 shareholders. The disadvantage is that you can only be a US Citizen or a permanent resident of the US. Failure to meet tax requirements may result in dismissal of your S Corporation status.
There is a limited amount of liability for a C Corporation. Endless growth potential exists, as one may have as many shareholders as they would like. It is important to remember that over 500 shareholders and $10 million in assets require registration with the SEC (Security Exchange Act of 1934). Taxes are filed quarterly. The tax advantage of a C Corporation is deductible business expenses. A primary disadvantage of C Corporations is double taxation. There is no deduction on personal shareholder taxes on corporate losses.
Limited Liability Company (LLC)
This is a combination of a partnership and a corporation. A LLC will protect you from any personal liability, and won’t tax you twice like a corporation. You have the ability to decide how you want your business to be taxed (S Corp., C Corp., partnership or sole proprietorship). This option also allows for significant flexibility regarding the distribution of your profits and losses. This means if there is more than one member of an LLC, they are not required to split their profits or losses equally. A disadvantage of running an LLC is that you are responsible for paying self-employment taxes for Social Security and Medicare.