One of the most complicated aspects of business formation is taxation. It is vital that you understand the different ways you can form a business: horror stories abound with business owners who rushed through the formation process and lived to regret it when the tax man came around or somebody launched a lawsuit.
Unfortunately, there is no one form of business formation that is better than others universally. You will need to make this decision based on which is most advantageous for you tax-wise, what your appetite for risk is, and how you will keep your records. With some business formations you are personally liable for business debts. In others you are not.
The sole proprietorship is the most common form of business organization in the US. As the name implies, a sole proprietorship has one owner and that owner has complete control over the business. In fact, if you do anything related to business at all and do not register as any other kind of business, the US government considers you a sole proprietor. However, because of this, the government does not consider sole proprietorships a business entity separate from the person who formed it. This means that the owner is personally liable for any business debt the company generates.
Partnerships are the most common choice for two people who wish to own a business together. The most common varieties are the limited partnerships (LP) or the limited liability partnership (LLP).
In an LP, one partner has unlimited liability while all other partners have limited liability. This means that the partner with unlimited liability is personally responsible for any debts that the business accrues. (Typically, in this setup, the unlimited liability partner has much more control over the company.) With LLPs, all partners have equally limited liability. This particular formation protects all of the owners from the actions of the other owners.
There are two main types of corporations: C-corp and S-corp. The main drawback to either kind of corporation is the amount of money they require for set-up: they are more expensive than either a sole proprietorship or any kind of partnership. They also require more extensive record-keeping and reporting. Both C and S corps offer the greatest amount of separation between the business entity and the owner concerning liability.
The major difference between a C-corp and an S-corp is how they are taxed. In certain situations the government may subject a C-corp to double taxation, but not all states equally recognize S-corps. Plus, fewer corporations qualify for the S status as compared to the C.
What about LLCs?
LLCs, or Limited Liability Corporations is a business structure that attempts to hybridize the advantages of corporations and partnerships. An LLC will shield you from personal liability while profits and losses can pass through to the owners without taxation. However, unlike other formations, state statutes govern LLCs. This means that different states have different policies for this formation.
Choosing your business formation has huge implications for the future of your company. Contact us today at AmeriEstate to talk about your options.