Business Structures

It is important to carefully consider and choose the appropriate entity type for your business. The entity type you select will have significant implications for various aspects of your business, including taxation, legal liability, ownership structure, and management flexibility. Each entity type has its own advantages and disadvantages, so it is crucial to evaluate your specific business needs and consult with professionals such as tax advisors or lawyers to determine the most suitable entity type for your situation.

SOLE PROPRIETORSHIP

Advantages of a Sole Proprietorship

• A sole proprietor has complete control and decision-making power over the business.

• Sale or transfer can take place at the discretion of the sole proprietor.

• No corporate tax payments.

• Minimal legal costs to forming a sole proprietorship.

• Few formal business requirements.

Disadvantages of a Sole Proprietorship

• The sole proprietor of the business is held personally liable for the debts and obligations of the business.

• All responsibilities and business decisions fall on the shoulders of the sole proprietor.

• Investors will not usually invest in sole proprietorships.

PARTNERSHIP

Advantages of a Partnership

• Partnerships are an inexpensive and easily formed business structure.

• Partnerships have the advantage of pooling resources to obtain capital.

• Partners are valuable assets when starting a new business. They bring their own knowledge, experience, and skills to the group.

Disadvantages of a Partnership

• Partners are not only liable for their own actions but also for the business debts and decisions made by other partners.

• Partners need to consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.

• Each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.

• Because of the separate nature of a joint venture, it is possible that the partners do not devote 100% of their attention to the project and become unreliable.

CORPORATION

Advantages of a Corporation

• For business debts and actions of a corporation, shareholders' personal assets are protected. Shareholders can only be held accountable for their investment in stock of the company.

• Corporations have an advantage when it comes to raising capital for their business through the sale of stock.

• Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.

Disadvantages of a Corporation

• The net profits of corporations are taxed twice corporate and individual tax level.

• The corporation has additional start-up costs and must file a separate tax return each year.

• A separate structure, corporations require scheduled director and shareholder meetings, minutes from those meetings, adoption, and updates to bylaws.

S CORPORATION

Advantages of an S Corporation

• First, there is no double taxation as there is with an ordinary corporation. The S corporation does not pay taxes, its net profits are passed through to shareholders who report and pay taxes on the net.

• While a sole proprietor or members of an LLC are subject to employment tax on the entire net income of the business, only the compensation for services paid to the S Corp shareholder is subject to employment tax. The remaining income is paid to the owner as "distributions," which are not subject to employment tax.

• Some expenses that shareholders/employees incur can be written off as business expenses. The tax savings achieved by S corporation owners are often more than sufficient to offset the need for additional formalities and paperwork.

Disadvantages of an S Corporation

• A shareholder who works for the S. Corporation must receive "reasonable compensation" for services rendered. If the S corporation pays an artificially low salary and thus pays higher amounts as "distributions," the IRS may reclassify the distributions as wages, resulting in higher taxes.

• It is a restrictive structure - The corporation must be domestic. There must be no more than one hundred shareholders. The shareholders must be U.S. citizens, resident aliens, estates, certain types of trusts, or tax-exempt entities.