If you are in the process of registering your business, you may find the task of choosing the appropriate business structure (also known as business entity) to be intimidating, but do not worry. Understanding the basics will allow you to apply this knowledge toward your current and future business endeavors.
Additionally, a business owner may choose to change the structure of their business to better suit evolving circumstances and developments in their business. Business liability, tax accountability, and investment potential are among the most notable factors that separate the different types of entities.
The majority of individually-owned new businesses are sole proprietorships. An individual (or a married couple) is in full ownership of this type of business, which is desirable to those who seek complete control over their business venture.
In a sole proprietorship, personal assets and debts are legally tied to those of the company. This means that owners of sole proprietorships are personally responsible for debts incurred by the business, and legal claims against the business can affect the sole proprietor’s personal funds. A sole proprietorship is not taxed as a business; The owner includes business losses and profits in their personal tax return. In a sole proprietorship, the owner and business entity are one. The owner is fully liable for business actions and assets. Assets and profits are taxed at the individual level, not as a business. Because a sole proprietorship is not separate from the individual who owns it, it is not the preferred choice of business structure for those who wish to have investors.
As the name implies, a partnership applies to businesses in which more than one individual holds an ownership title in a company. A partnership may be general or limited, with varying degrees of personal liability between partners and shared control over business decisions. Business assets, profits, and losses are also jointly shared in a partnership. As it relates to taxation, partnerships are also taxed at an individual level, referred to as “pass through” taxation.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a business in which owners are free from personal liability for debts related to their company. Limited liability companies benefit from the pass through taxation also seen in partnerships and sole proprietorships. As with sole proprietorships and partnership entities, members of an LLC are taxed only once. The owner of an LLC can operate as the sole owner or work alongside partners (often called “members”) to set up and operate the business.
C Corporation (C-corp) and S Corporation (S-corp)
A corporation is often the preferred business structure for those seeking investors. Earnings in a C-corp are taxed on the business (corporate) level, and business owners file their own taxes separately, a process referred to as “double taxation.” This type of structure allows for shareholders to be paid in dividends, which are reported in tax filings separate from the owners’ personal taxes. In an S-corp, profits are not doubly taxed. Shareholders report earnings from the business on their individual taxes. An S-corp requires one hundred or fewer shareholders.