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What Business Entity Is Best For My Company?

January 06, 2017 By cookmartin

The structure you choose for your company will have a huge impact on your taxes, your liability situation, and many other important aspects of running a business.  

Let’s take a look at a few of the most common types of business entities:

 

Sole Proprietorship

It’s easy to start a sole proprietorship – you don’t have to file any paperwork to register as a sole proprietor or anything like that (though you may have to get a license, depending on what you do). Basically, if charge your clients directly rather than working for a company that charges clients, you’re automatically a sole proprietor. The owner and the business are the same thing in this situation.

Sole proprietorships aren’t taxed – the owner claims all profits and losses in their personal tax return.

The downside to a sole proprietorship is that it puts your personal assets at risk should you/your business get sued or take on a lot of debt.

Partnership

Partnerships involve two or more people sharing ownership of a business. Unlike a sole proprietorship, you’ll have to jump through a few hoops to set up this kind of structure. You need to register with the state, make a partnership agreement, and decide on a name.

The upside to partnerships is that you have multiple people that can contribute time and money to your organization and help it grow. The downside is that, like a sole proprietorship, you’ll be personally responsible for debt your business incurs.

C Corporation

The “C” in C Corporation refers to the subchapter in the IRS tax code that defines this type of business entity. A C Corporation is kind of like a fake person – it can buy property in its own name, sue people, etc. And when a C Corporation gets sued itself, the owners’ personal assets are protected in most cases. The owners of C Corporations are called shareholders, as shares of stock represent their ownership.

The disadvantage to C Corporations is that they involve a lot of taxes and a lot of hassle. C Corporations are effectively taxed twice: once for the income that the business itself makes, and then again for the income shareholders make through dividends.

With a C Corporation, you also need to put up with a bunch of corporate formalities to maintain your business’s status as a separate legal entity. This includes events like shareholders meetings and board of directors meetings (oh yeah, and you’ll have to elect a board of directors, too).

S Corporation

An S Corporation is a lot like a C Corporation in that it’s an artificial person people create with state approval to separate their business ventures from their personal lives.

The difference, though, is that S Corporations are structured so that the owners are treated like a partnership for federal tax purposes. This means that they don’t have to pay taxes at the corporate level, which allows owners to avoid the double taxation problem that C Corporations face.



Conclusion

Choosing the proper form of business is key when you start up. Have any questions about business entity selection? Feel free to contact us and ask.

 

Download Now: 7 Tips for Reducing Your Tax Liabilities

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