Which Business Entity Is Right for You?

April 20, 2018
Andrew Cove

One of the most difficult business decisions that you’ll face will happen before your business even begins—deciding which kind of business entity to create. This important initial decision will lay the groundwork for many other important decisions that will happen later on. So which one is right for you?

Sole Proprietorship

If you intend to own your business on your own, without partners, this is likely the right choice for you. With a sole proprietorship, you know that you will not have any partners (now or in the future) as you own and operate your business.

One distinct benefit of a sole proprietorship is that you will get to file your income and expenses from your business on your personal taxes. This means that any business loss may help offset the taxes on any other income that you may have earned through the year. However, this benefit is a double-edged sword. On one hand, you get to file your business’s taxes with your personal taxes. But on the other hand, you have to pay self-employment taxes and file quarterly income tax estimates. This means more paperwork and tax calculation throughout the year.

There are two other possible reasons why you might not choose a sole proprietorship. First, since you are the only one associated with the business, you put your personal assets at risk if the business goes into debt. Second, it tends to be more difficult for sole proprietorships to raise money for capital initially and get loans from the bank.

Partnership

If your business is going to be owned and operated by several people, consider creating a partnership. You’ll need to decide if you want to have a general partnership (where the partners manage the company and assume responsibility for the company’s debts) or a limited partnership (where there are general partners and also limited partners who serve merely as investors)

One of the benefits of a partnership is that there are no taxes for the business to pay. Instead, any profits or losses are passed on to the members of the partnership, who pay taxes accordingly. Although no partnership taxes are paid, all the paperwork must still be completed and filed.

If you are going to form a partnership, make sure that you have a solid partnership agreement in place before creating your business. Make sure to contact a lawyer to help you draft the best partnership agreement possible, and you’ll make your life a whole lot easier if any questions or issues should arise later on down the road.

C-Corp

The C-Corp is a little more complex and expensive than other business structures because it establishes the individuals as separate from the business. Because of this, there are more regulations and tax requirements. However, this separation also has a huge benefit. It means that if your business does poorly, you are not held personally liable for its losses.

There are several disadvantages, though, to creating a C-Corp. First, it costs more to create. Second, state laws vary for C-Corps. You’ll usually want help from a qualified business lawyer to help you decide if it’s worth it for you to create a C-Corp in your state.

The final (and maybe most significant disadvantage) is double taxation. With a C-Corp, the business is responsible for paying taxes on its earnings. Then, when the earnings are passed onto the shareholders, those individuals will have to pay income tax on the amount they receive when they file their personal taxes.

S-Corp

The S-Corp is often a better choice for small business owners because it provides liability protection and offers the benefit of paying the company’s taxes through an individual’s tax return. Also, S-Corps allow you to choose whether you use cash or accrual accounting methods.

However, you still have to follow many of the C-Corp laws and regulations. This means you won’t be paying any less for legal and tax service fees than if you created a C-Corp. It also means complying with business laws, like filing the Articles of Incorporation and holding shareholders meetings.

Limited Liability Companies (LLC)

An LLC is a mix of some of the benefits of partnerships and corporations. LLCs were created to provide business owners with the liability protection of a corporation, but without the double taxation. Like an S-Corp, the earnings and losses of the business are reported on personal tax returns.

LLCs offer other a couple of other benefits. Unlike S-Corps, there’s no limit on the number of shareholders. Also, any member or owner is allowed to fully participate in the business.

Be aware, though, that there are some disadvantages to LLCs as well. For example, they do not have perpetual life and must dissolve after 30 or 40 years. Also, since LLCs are a relatively new business structure, their taxation varies by state. This is worth investigating before you file any paperwork.

Still Confused?

If you’re still confused about which business entity is best for you or if you have any other business law questions, consult with a qualified business lawyer. Contact Cove Law if you’re starting your new business in Florida. With years of business law experience, the professionals at Cove Law are ready to answer your questions and help you create your business exactly how you’ve imagined.

Andrew Cove
Latest posts by Andrew Cove (see all)