When you are starting a business, there are so many things which comes to your mind and the first things you want to do is to choose the structure of your firm—in other terms, Select a business entity type.
These are the Business Entity Types in USA: –
- Sole Proprietorship
- General Partnership
- Limited Partnership
- C-Corporation
- S-Corporation
- Limited Liability Company (LLC)
The type of entity you choose for your business defines how your company is formed and taxed. Decision for choosing the firm structure will have important legal & financial implications for your business. The amount of taxes you have to pay depends on your business entity choice, as does the ease with which you can get a small business loan or raise money from investors.
Why is Business Structure Important?
Not all business structures are created equal. In fact, each structure has definitive pros and cons. Know why the structure of business is essential:-
- How liquid do you want or need ownership of my business to be?
- How important is it to protect yourself from personal liability?
- Which business entity will give you the best tax treatment?
- Which is the best business structure for attracting & retaining employees?
Sole Proprietorship
A sole proprietorship is the simplest business structure, with one person (or a married couple) as the sole owner and operator of the business. If you start a new business and you are the only owner then automatically you are a sole proprietorship under the law. No need to register a sole proprietorship with the state, you need local business licenses or permits depending on your industry.
Consultants, Freelancers and other service professionals usually work as sole proprietors, but it is also a feasible option for more established businesses like retail stores, with one person at the helm.
What are the Advantages of Sole Proprietorship?
- Easy to start.
- No corporate formalities or paperwork requirements like meeting minutes, bylaws, etc.
- You can deduct most business losses on your personal tax return.
- Tax filing is easy—simply fills out and attaches Schedule C-Profit or Loss From Business to your personal income tax return.
General Partnership
General Partnerships have many similarities with sole proprietorships; main difference between them is that the business has two or more owners. There are two kinds of partnerships: GP (general partnerships) & LP (limited partnerships). In General Partnerships, all partners of firm actively manage the business and share in the profits & losses.
What are the Advantages of General Partnership?
- Easy to start.
- No corporate formalities or paperwork requirements like meeting minutes, bylaws, etc.
- You don’t need to absorb all the business losses on your own because the partners divide the profits and losses.
- Owners can deduct most business losses on their personal tax returns.
Limited Partnership
Compared to general partnership, a limited partnership (LP) is a registered business entity. For the formation of limited partnership, you need to file paperwork with the state. In a limited partnership, there are 2 kinds of partners: those who own, operate, and assume liability for the business (general partners), and those who act only as investors (limited partners) sometimes called silent partners.
Limited partners do not have control over business operations and have fewer liabilities. They commonly act as investors in the business & also pay fewer taxes since they have a more tangential role in the company.
What are the Advantages of Limited Partnership?
- An LP is a good option for raising money because investors can serve as limited partners without personal liability.
- General partners get the money they need to operate but maintain authority over business operations.
- Limited partners can leave anytime without dissolving the business partnership.
C-corporation
A C-corporation is termed as an independent legal entity that exists separately from the company’s owners. Board of directors, Shareholders (the owners) and officers have control over the corporation, although one person in a C- corporation can fulfill all of these roles, so it is possible to go for this kind of firm where you are in charge of everything.
With this type of business entity, there are many rules-regulations and tax laws that the company must execute with. In this kind of business formation the methods for incorporating, fees, and required forms can differ from state to state.
What are the Advantages of C-corporation?
- Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.
- C-corporations are eligible for more tax deductions than any other type of business.
- C-corporation owners pay lower self-employment taxes.
- You have the ability to offer stock options, which can help you raise money in the future.
S-corporation
An S-corporation sustains the limited liability that comes with a C-corporation but is a pass-through entity for tax purposes. It means that, similar to a sole proprietor or partnership, profits and losses pass through to the owners’ personal tax returns in S-corporation. In S- corporation, there is no corporate-level taxation.
What are the Advantages of S-corporation?
- Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.
- No corporate taxation and no double taxation: An S-corp is a pass-through entity, so the government taxes it much like a sole proprietorship or partnership.
Limited Liability Company
A limited liability company takes positive characteristics from each of the other business formation types. In one hand LLCs offer limited liability protections but in other hand LLCs also have less paperwork and ongoing requirements, and in that sense, they are more like sole proprietorships & partnerships.
Another huge advantage is that you can choose how you want the IRS to tax your LLC. You can choose to have the IRS treat it as a corporation or as a pass-through entity on your taxes.
What are the Advantages of Limited Liability Company?
- Owners don’t have personal liability for the business’s debts or liabilities.
- You can choose whether you want your LLC to be taxed as a partnership or as a corporation.
- Not as many corporate formalities compared to an S-corp or C-corp.