Talk to an accountant if you are unsure which organizational business structure you should choose.
What is an LLC?
A Limited Liability Company (LLC) blends the aspects of corporations, partnerships and sole proprietorship into a simple and flexible business entity. LLCs offer the same personal liability protection as corporations with few corporate formalities. LLC entities can be used to hold property and transact any type of business. They protect the owners and operators from personal liability similar to a corporation, and they possess the "pass-through" tax benefits of a partnership. Additionally, LLCs do not require the typical formalities that are required when managing a corporation.
What is a Corporation?
A corporation is a legal entity created separately from those who own and operate it. As a separate entity, the corporation's debts and taxes are separate from its owners (shareholders), thereby offering the greatest personal liability protection of all business structure. Corporations also offer tax savings and the ability to raise capital under your business name.
In a sole proprietorship, you own the business. This is the most common business structure type for small businesses when they first start out.
That is because it is the fastest and least expensive way to start a business.
Unfortunately, this small business structure leaves the owner at risk for personal financial ruin. In the eyes of the law you ARE the business. You and your business are one entity. If your business defaults on a loan, you are personally responsible.
If someone sues your business and your business is found at fault, you, as the sole proprietor, are responsible for the judgment against the business.
What that means is that your personal savings, your property, even your home can be seized to pay back debts.
All profits must be listed as income on your personal tax returns. Some would consider that a negative, others may not.
Another point to consider is that it is very difficult to secure any type of traditional funding, such as bank loans, when operating as a sole proprietor.
On the positive side, you also receive all income from the business. Also, if you want to dissolve the business, it is very simple to do so.
The pros and cons of this organizational business structure are similar to those of a sole proprietorship. The difference is that instead of one owner, there are two or more. That means that all decisions, revenue and liability are shared between all owners of the business.
If you choose to operate as a partnership, be sure to spend the needed time and money to have a lawyer draft a partnership agreement that is acceptable to all partners. Remember that if you choose this business structure, your personal savings and property is still at risk should the business be sued or default on a loan.
If you choose to run your business as a corporation, whether as a LLC, a C Corp or a S Corp, you will have chosen a organizational business structure that relieves you and other owners of much of the personal financial liability. Keep in mind, however, that officers can still be held liable for their actions as they relate to the business.
When a business is set up as a corporation, the law views it as a separate entity from its owners. While you and your business are one and the same under a sole proprietorship, you are distinct under a corporation. It is more expensive and time consuming to set up a corporation and, depending on the type of corporation and other factors, your business taxes may actually go up. Still, there are advantages. The business can sell stock to raise additional capital and there are some tax benefits as well.
Which business structure type is right for your business depends on many factors. If you’re not sure which is right for you, seek help from a financial professional or tax attorney. If you do not already have a financial professional or tax attorney Essential Services will refer you to one of our may business associates.