What Type Of Business Entity Is Best For Me?

There are many types of businesses out there, and choosing the right business structure can make all the difference in the world. Here are some of the most common types of businesses, and the potential pros and cons they offer:

• Sole Proprietorship

  • What is this?

    • A sole proprietorship is the most basic type of business. You are the sole owner of the business, and there is no real distinction between the business and you.

  • Pros:

    • It is easy to set up, requiring relatively little in the way of paperwork. All you need to do is start doing business in order to “form” this type of company.

    • You have complete control over business operations and decisions.

    • You get to keep all profits from your business if it is successful.

  • Cons:

    • You need to take care of every part of running the business yourself.

    • You are personally responsible for all legal and financial liabilities, including taxes, business expenses, debts, and other costs.

    • You have no legal protections if you are sued, and must pay the full cost of any legal fees or judgments out of pocket.

• Partnership

  • What is this?

    • A partnership is similar to a sole proprietorship, except it is run by you and at least one other business partner. Ownership and control of the company is split between all partners, as are the company’s profits. While some partnerships have formal operating agreements, this is not strictly necessary in many jurisdictions.

  • Pros:

    • You can split up job responsibilities between yourself and your partners.

    • Partnerships generally have relaxed filing requirements, similar to sole proprietorships.

    • All costs are split between you and your partners.

  • Cons:

    • You must give your partners a split of the company’s profits.

    • Your business partners may make decisions you do not agree with.

    • You do not have no personal protections against legal or financial liabilities, such as taxes or debts.

• Corporation 

  • What is this?

    • A corporation is a type of formal business entity created by filing articles of incorporation. This entity is considered a “person” distinct from its owners, known as shareholders. It owns its own property, its own bank accounts, and has its own legal responsibilities.

  • Pros:

    • Corporations protect their shareholders from legal and financial liability, so they are never personally responsible for debts, expenses, or legal judgments. Even if the company fails, you will not be responsible for personally paying what it owes.

    • Transferring ownership is generally simple, requiring only for a shareholder to sell their stock in the company.

    • Corporations have an internal organization that can make it easier to scale up a company as it grows more successful.

  • Cons:

    • Operating a corporation involves strict legal requirements, including holding regular shareholder meetings and board meetings, as well as maintaining separate bank accounts for the company.

    • A corporation’s legal protections, or even its ability to do business, can be put at risk if you fail to keep up with these basic requirements.

    • Corporations are subject to “double taxation,” meaning their profits are taxed twice: once when they make their money from doing business (taxed as corporate income), and again when they distribute their profits to shareholders via dividends (taxed as capital gains).

• S Corporation (S-Corp)

  • What is this?

    • A Subchapter S Corporation, or S-Corp, is a specific type of corporation that meets certain requirements, allowing it to operate as a pass-through entity. This means that the profits from the corporation “pass through” to the shareholders as personal income, rather than as corporate profit.

  • Pros:

    • S-Corps avoid the problem of double taxation, potentially saving a significant amount of money in taxes.

    • Changing ownership is just as easy as with an ordinary corporation, only requiring someone to sell their shares.

    • They offer the same liability protections as an ordinary corporation, ensuring you do not need to face personal financial hardship if the company faces legal issues or incurs debt that it cannot pay, unless you made a personal guarantee.

  • Cons:

    • A company must meet certain additional requirements to be able to seek S-Corp status, including restrictions on who can own stock in the company.

    • S-Corp status can be stripped if you fail to meet these requirements for whatever reason.

    • S-Corps may not be appropriate for larger companies, or ones which operate in international markets.

• Limited Liability Company (LLC)

  • What is this?

    • An LLC is an unincorporated business entity which offers liability protections to their owners (known as “members”). LLCs can be owned by a single person, or may have an arrangement similar to a partnership.

  • Pros:

    • LLCs are far less formal than corporations, with significantly less stringent legal requirements.

    • LLC members are protected from legal and financial liability, in a manner similar to the protections offered by corporations.

    • LLCs are pass-through entities, similar to S-Corps, meaning they also do not face double taxation.

  • Cons:

    • LLCs can be surprisingly inflexible, and transferring ownership can be difficult, depending on the terms of the operating agreement.

    • LLCs tend not to scale as well once a company begins to grow, compared to corporations.

    • LLCs can struggle to operate internationally, and may face additional restrictions, taxes or fees outside of their original jurisdiction.

If you are interested in starting a business and would like to speak with a trusted counselor and attorney, contact John Zaher at 631-310-4655 or on his mobile phone at 631-375-8770, where he can be reached 24/7/365. He will meet with you, discuss your business goals and help you develop a business structure and plan to meet those goals.