Opening a new business is an exciting time filled with hope, anticipation and some stress. A business plan will help you focus on your goals for the future; however, it will also help you determine what business structure to use to reach those goals. Each type of business structure has pros and cons that are inherent to that structure. When choosing a business structure for a new business, you should be familiar with each of the pros and cons to determine which type of structure will best suit your needs.
Sole Proprietorship – This is the simplest from of business structure and the easiest to set up and maintain.
-Easy to set up – no government forms required to be filed or prepared to set up a sole proprietorship.
-Easy to maintain – no special meetings, books or records to keep.
-No double taxation – income and loses are reported on the owner’s personal tax return.
-Personal liability – the owner is personally liable for all debts of the company.
-Self-employment tax – you may have to pay self-employment tax, which could be high depending on your business.
-No life insurance deduction for the owner and health insurance deductions may be limited.
Partnerships – Partnerships provide a business structure for individuals who want to join together to own and operate a business.
-No double taxation – partnership income is reported and taxed on each partners personal tax returns.
-Offers partners a way to structure their business to meet their specific needs.
-Setup cost – a properly drafted and executed Partnership Agreement can be expensive (i.e. attorney’s fees, accountant fees, etc.).
-No protection from liability – each partner is personally liable for the debts of the partnership unless they are a limited partner, and this is still very risky.
Corporations – A corporation is owned by shareholders and is considered a legal entity in the eyes of the law.
-Limited liability – shareholders are typically not liable for the debts of the business provided they do not issue personal guarantees for the debt.
-Health insurance premiums and group life insurance are deductible up to a maximum amount by the corporation and are not taxable to the employees.
-The corporation is considered a separate legal entity from the shareholders that provides another layer of protection against liability.
-A corporation is more costly to set up and maintain. An attorney and an accountant are typically required to set up and maintain some of the records.
-The corporation must file its own tax returns and pay income taxes on its income. Shareholders pay tax on the dividends paid to them by the corporation.
-Shareholders cannot deduct the losses of the corporation on their personal tax returns.
-Shareholders have a limited amount of control over how the corporation is operated. The control is determined by the number of shares (percentage of ownership) that the shareholder owns.
Limited Liability Corporation – This is a hybrid business structure that carries some pros and cons of the sole proprietor and corporate business structures.
-Members have limited liability rather than full liability as in a sole proprietorship.
-No double taxation – members typically report business income and loss on their personal tax returns.
-The number of members may range from one to more than seventy-five.
-Easier to set up and maintain than a corporation.
-Members are subject to self-employment taxes.
-Members have more liability for company debts than shareholders do in a corporation.
-Laws regarding LLCs are changing and evolving, so owners must keep updated about changes.