The 101 on business entities to help you choose the right one

4 years ago by in Launch, Legal Structure + Protection
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start_something_1One of the most important, unglamorous choices you will make when starting a business is the type of legal organization you select for your company.

This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money.

For startups or companies planning on scaling and raising money, we headed over to Quora to get the scoop on LLC vs. C-corp – here’s a great thread.

Most popular legal filing services are Rocket Lawyer, LegalZoom, and CorpNet, co-founded by Nellie Akalp, with a free wizard to help you figure out the best structure. Nellie also wrote a great summary of business entities on Freshbooks.

Here’s the skinny on each of the business entities. 

Limited Liability Company (LLC)

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Read more on SBA.gov about how to form one and the advantages/disadvantages. 

Corporation – C-Corp

A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.

Read more on SBA.gov about how to form one and the advantages/disadvantages. 

S Corporation
An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.
What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to the your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.
Partnership

A partnership is a single business where two or more people share ownership.

Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Sole Proprietorship

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

Read more on SBA.gov about how to form one and the advantages/disadvantages of a sole proprietorship. 

Photo courtesy of Pinterest.

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