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Choosing a Business Structure

When starting a business, it is important to consider the business structure.  There are many aspects to consider when choosing a business form including the industry, the nature of the business, legal factors, taxation, and other factors.  Let’s look at some of the differences between business entity types.

Sole Proprietorship

Pros:
Low cost of formation.
Assets can be transferred to and from the business with no tax effects.
No double taxation – all income is reported on the owner’s individual tax return.
Easy to dissolve.

Cons:
The owner is fully responsible for all liabilities of the business.
All of the income from the business is subject to self-employment tax.
It can be difficult to raise additional capital.

Partnership

Pros:
No double taxation – all income is reported on the partners’ individual tax returns.
Flexibility in the allocation of profits, losses, and distributions between the partners.
Low cost of formation.

Cons
The partners are fully responsible for all liabilities of the business.
Each partner is liable for the actions of other partners.
All of the income from the business is subject to self-employment tax.

Limited Liability Company (LLC)

Pros:
Members are generally shielded from personal liability for the debts of the LLC.
Flexibility in the allocation of profits and losses between members of the LLC.
The entity can choose to be taxed as a Partnership, S-Corporation, or C-Corporation.
There is no limitation on the amount of members.

Cons:
More costly than a sole proprietorship or a partnership.
Many states have additional franchise or capital taxes on LLCs.
The laws vary widely from state to state.

C-Corporation

Pros:
Ownership is easily transferable.
The shareholders’ risk is limited to their investment in the corporation.
Easier to raise capital.

Cons:
Higher cost to form and maintain.
Double taxation when income is distributed to the shareholders.
More regulated than other entity types.

S-Corporation

Pros:
Income is passed through to the shareholders, avoiding double taxation.
The shareholders’ share of income from the corporation is not subject to self-employment tax.
The shareholders’ risk is limited to their investment in the corporation.
Ownership is easily transferable.

Cons:
Limitations to the amount and type of shareholders.
The corporation can only have one class of stock.
Higher cost to form and maintain.

 

Jeff Cyron

jcyron@stephanoslack.com

302-777-7400

December 5, 2017