Your business entity has a large impact on your taxes and other liabilities. When beginning a business, you must decide what form of business entity to establish. While it may seem easy to determine which type of entity you need to use, we have experienced many examples of why it may not be so. From your company’s inception through its growth and development, we can advise you on choosing an entity type and later restructuring if advantageous.
The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure. Each type requires careful thought and preparation, factoring legal liabilities, tax implications, cost of formation and ongoing administration, flexibility and future planning.
A Sole Proprietor is someone who owns an unincorporated business by himself or herself. This is NOT to be confused with being the sole member of a domestic limited liability company (LLC). It's easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
A Partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. A primary disadvantage is liability: Each partner is personally liable for the financial obligations of the business.
In forming a Corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required.
Smaller companies can become S Corporations. S-corps are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation corporate income.
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with us if you are interested in starting a Limited Liability Company. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.