Which Business Structure Should You Choose?

Which Business Structure Should You Choose?

September 03, 2017

If you're thinking about starting a new business, you would be in good company.  According to U.S. Small Business Administration, there are more than 28 million small businesses in the United States. Small businesses (defined as businesses with fewer than 500 employees) account for 99.7% of all business in the US.

One of the next steps in the business process, after you've come up with a catchy name, is deciding which business structure to adopt. Each option available has its own set of pros and cons. You may want to seek legal or tax advice to determine which structure is best for your new organization. 

Sole Proprietorship/Partnership

Setting up a sole proprietorship/partnership is the simplest structure, but it creates no separation from its owner. Every penny made from the business is simply added to the individual's personal tax return.

Advantages: Easy to set up and simple to maintain.

Disadvantages: Owners are personally liable for the business’s financial obligations, exposing their personal assets (house, savings, etc.). It does not offer the prestige or sense of permanence of a corporation or LLC.

Limited Liability Company

An LLC is a hybrid between a corporation and a sole proprietorship, offering easy management, pass-through taxation, and the liability protection of a corporation. Similar to a corporation, it is a separate legal entity, but there is no stock.

Advantages: LLCs provide the protections of a corporation, but are taxed similarly to a sole proprietorship.

Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.

S-Corporation

After forming a corporation an owner may elect an “S-Corporation Status” by adopting a resolution to that effect and submitting Form 2553 to the IRS.

The S-corporation is taxed like a sole proprietorship, i.e., the company’s income will pass through to shareholders and be reported on their respective personal tax returns.

Advantages: S-corporations avoid the double taxation issue associated with C-corporations while enjoying many of their tax advantages. Owners are shielded from personal liability for the company’s financial obligations. It provides the prestige of a corporation for small businesses.

Disadvantages: S-corporations do not have all the tax-deductible expenses of a C-corporation. The cost of set up, the paperwork, and formality are greater than for a sole proprietorship or LLC. S-corporations have certain restrictions, including a "100 or fewer" shareholders requirement. Shareholders must be U.S. citizens and the business cannot be owned by another business.

C-Corporation

A corporation is a separate legal entity from its owners, making it easier to raise money, issue stock, and transfer ownership. Its life is perpetual and will survive the owner’s death.

Advantages: There may be tax advantages, including more allowable business expenses. It protects owners from personal liability for the company’s financial obligations and may lend a measure of prestige and permanence.

Disadvantages: More expensive to set up, the paperwork and formality are greater than for a sole proprietorship or LLC. Income may be taxed twice, once at the corporate level and when distributed to owners as dividend income.

Just remember, the choice of business structure is not an irreversible decision. You may amend your business structure to accommodate the changing needs and circumstances of your company.

About Terrell Dinkins, MBA, ChFC®

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Terrell Dinkins, MBA, ChFC® is an investment adviser representative of and offers investment advisory services through OBN Wealth Advisors, LLC, a registered investment adviser offering advisory services in the State of Georgia and other jurisdictions where registered or exempted. Main Office: 950 Eagles Landing Pkwy, Suite 216, Stockbridge, GA 30281. Tel: 404-723-9780. Website: OBN Wealth Advisors