Have you been in business for a while (or just starting out) and wonder if you're on the right track with your business structure?
Are you wondering what types of business entities are available to help save you money on taxes or shield you from liabilities?
Maybe you think your company is too small to incorporate. Did you know that 84.9% of the C-corporations in the U.S. in 2015 had fewer than 20 employees?
We're not saying incorporation is the best choice for you.
We're just suggesting you consider all the alternatives available. Make sure your business entity type is the best fit for your company.
Let's discuss some of them now.
Types of Business Entities
When starting a business, there are many business types to choose from.
Each has its own advantages and disadvantages when it comes to the ease of formation, tax advantages, protection from liabilities and lawsuits, and more.
It's important to take the time to learn about the various options available to find the one that best fits the needs of your company.
Below is a summary of five of the most common types of business entities.
A sole proprietorship is a business owned by one person for profit. It is the easiest type of business to set up and end. But sole proprietorships do not offer any protection to the owner.
The owner is entitled to all the income from the business but is also personally liable for all the debts incurred. If any claims are brought against the business, the owner is personally liable for them too.
If you want to do business under a name other than your own, you will need to file a notice that you are doing business as (aka d.b.a.) the name you've chosen. Doing so doesn't protect you from personal liability.
You will file a Schedule C along with with your individual income tax return to report the profit or loss from your business.
A general partnership is one of the types of business partnerships. A general partnership is owned by two or more people or business entities.
A general partnership can be formed without a formal written agreement. But it is generally recommended that the agreement between the partners be written down. This is especially true if the income from the partnership won't be divided equally among the partners. Or all partners do not contribute an equal amount of capital or other resources into the business.
All partners are personally liable for the debts of the partnership. So disputes can arise, for example, when a partner takes on debt for the partnership without the other partners' consent.
A partnership doesn't file its own tax return, but it does have to file a Form 1065 - U.S. Return of Partnership Income every year. Form 1065 will report how much income or loss flowed through the partnership to the partners. Each partner will then report this income or loss on their own individual tax return.
Limited Liability Partnership
A limited liability partnership consists of one or more general partners and at least one limited liability partner.
Limited partners have limited personal liability for debts incurred by the partnership. The limit is up to the capital they put into the business. Limited partners do not take an active role in the management or operation of the business. If they do, they can lose their limited liability status.
In order for a limited liability partnership to be valid, the partnership must be registered with the state where the partnership does business.
Corporations are their own entity owned by individual shareholders. Shareholders are protected from liabilities owed by the corporation.
Shareholders vote to elect a board of directors who have specific duties oversight duties. The board of directors chooses the officers for the corporation. The officers are responsible for hiring people to handle day-to-day business activities.
Corporations are considered their own separate entity and corporations file their own tax returns. The corporations pays dividends to the shareholders. Shareholders then pay tax on the dividends on their individual shareholder's tax return.
Before creating a corporation, you should consult with an attorney to discuss which type of corporation to for. Two types of incorporations are C-corporations and S-corporations. You will also need to make sure you're aware of the various corporate reporting and filing requirements.
Further, an attorney can explain how to maintain the protected status against personal liability.
Limited Liability Company
A limited liability company is another one of the forms of business ownership. The people who own them are called members.
The rules for forming a limited liability company (LLC) vary from state to state.
In some states, like South Carolina, you will need to file Articles of Organization with the Secretary of State to form a limited liability company. In others, the form is a Certificate of Formation.
Members of an LLC have limited liability protection from the liabilities of the LLC.
Like a partnership, profits and losses flow through the LLC to the members. However, members do not claim the profit or losses on their individual tax returns. Members can opt to be taxed in one of two ways: as a partnership or as a corporation.
Make the Right Choice - Talk to an Attorney Today
Wherever you are in your business planning, now is the best time to talk to an attorney about the types of business entities that will work best for your company.
Laying the proper foundation for your business will give it the structure and stability you'll need to make your business a success.
Contact us today to set up a free consultation to discuss your business and which business entity options are best for you.