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Starting a business is a very complex and emotional time. Business owners are faced with many important decisions, including establishing a business plan, raising capital and selecting the right employees. But one aspect that is often overlooked is the proper business structure.
One popular choice is the sole proprietorship. This is an unincorporated business that is owned by just one individual. It is an easy business structure to start and maintain. The business itself has no existence apart from the owner. The owner has the business risk for all assets owned. The income and expenses are included on Schedule C of your individual tax return.
Corporations are a more sophisticated entity. The shareholders of the corporation may contribute money, equipment or other property and will receive stock in the entity in return. Corporations are subject to double taxation which is not an advantage for many business owners.
S Corporations have risen in popularity in the past decade and it has become the favored entity structure for many business owners. Corporations that are eligible can escape the double taxation of traditional C Corporations by making a simple election. S corporations, in most situations, are exempt from federal taxes other taxes on specific capital gains and on excessive passive income.
A partnership is another popular form of ownership. A partnership exists when two or more people join together to carry on trade or business activities. Normally in a partnership each partner contributes cash, experience, equipment or property, and/or labor and is due a share of the profits and any resulting losses of the trade or business. A partnership files a separate tax return.
A limited liability company (an “LLC”) is a business structure that is formed under state law. The members of the LLC are not personally liable for its debts. LLCs have certain default tax classifications, but may elect (under certain circumstances) to be classified for tax purposes as one of the entities previously discussed.
There are many factors that need to be considered when a business owner is considering business structures. No one entity is right for all business owners and the circumstances can change drastically based on your industry, personal tax situation, or state that you operate in. Make sure to seek the advice and counsel of a CPA or other qualified tax or legal professional.
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