Business Entities – The Pros And Cons Of Each
There are many important things to consider when setting up a business, and what kind of entity it’s registered as is one of them. Understanding business entity type comparison is critical in setting up your business – it will determine what type of organization best meets your needs. LLC or S corp which is better? Below are the most common types of business entities and the pros and cons of each.
The easiest and simplest business structure, sole proprietorships have a single owner who is responsible for everything.
Sole proprietorships are the easiest business entity to establish. State or federal registration of the business is generally not necessary. The business can have a “Doing Business As” name separate from your own. Owners simply report business income on their personal tax returns.
There is no legal differentiation between the owner’s individual tax status and the company’s. This means that any debts or legal action incurred by the business is against the individual, not the business.
Partnerships are the simplest business structure if you are not the sole proprietor, or the only one running the business.
Each individual partner is responsible for reporting business income on his or her personal tax returns. Partnerships are quite flexible and there are different kinds to choose from based on how much influence different partners are allowed to have. Partnerships are easy to set up.
Like sole proprietorships, partners are not legally separate entities from the business and are personally liable for debts and legal action. Management issues can be particularly problematic when more than one person has equal decision-making power.
Limited Liability Corporations (LLC)
LLCs have grown in popularity recently as an attractive “hybrid” structure. It is a separate entity to protect owners from liability, but LLCs to not need to file corporate tax returns.
LLCs are separate legal and tax entities from their owners, so you do not have as much liability. No double taxation will occur and no business tax returns need be filed. LLC owners do not have to be US residents, unlike s corporations.
Earnings from LLCs are subject to self-employment tax, which can be pricey as you owe tax both as employee and employer. As a newer type of business entity, LLC regulations can be complicated and vary by state. LLCs also cannot issue stock to attract investors.
S corporations are like c corporations but were a classification formed with a smaller organization in mind.
Less complex than a c corporation. Owners report their own profit and loss in the corporation on their personal tax returns. Taxes only need to be filed annually rather than quarterly. Owners and shareholders can deduct business losses from their personal tax returns. S corporations are not subject to double taxation and provide liability protection to their owners.
S corporations are required to hold meetings annually and record minutes. They may not have more than one hundred shareholders or more than one kind of stock. Only US citizens or permanent residents are allowed to be owners or shareholders.
C corporations are the most complex business structure and come with an air of credibility.
C corporations continue to exist even after the owner leaves the company, and they can be owned by another business rather than an individual owner. C corporations have no limitations on the sale of stocks. Limited liability for all employees, owners, and shareholders.
C corporations must file taxes quarterly and are very expensive to start. C corporations are also subject to greater state and federal regulation than other business entities. Owners and shareholders can NOT deduct business losses from their personal tax returns.
If you’re looking to start a business in New York or any other state, it’s critical that you have a good understanding of the different types of business entities and consult a tax professional to ensure your business is set up correctly right from the start. If you’d like to know more about how we can help you select the right business entity for your business, call us for a FREE Business Entity Consultation at (855) 829-8477.