When starting a business, one of the most important decisions you will have to make is what entity structure you should use. This decision will affect how your business is taxed and how much liability protection you have. It’s important to understand the different types of entities and how they can benefit your business before making a decision.
Types of Entities
The four most common types of entities are sole proprietorships, limited liability companies, partnerships, and corporations. Each type comes with its own pros and cons.
Sole Proprietorship
A sole proprietorship is a business owned by one person who has unlimited personal liability for all debts incurred by the business. This means that all business assets and liabilities are in the name of the individual owner. If a creditor sues the company, it is possible that personal assets may be seized as part of any judgement against the company. Although this type of entity does not require formal paperwork to set-up or annual filings, it does come with some risks from potential creditors or lawsuits.
Limited Liability Company (LLC)
An LLC combines aspects of both corporations and partnerships by providing limited liability protection for its owners while also providing them with pass-through taxation benefits similar to those offered to partnerships. It provides more flexibility than other entities because it allows members to make decisions about how their company operates without having to worry about additional regulations imposed on corporations by state laws. The downside to an LLC is that they often require more paperwork than other entities because they must file articles of organization with the state as well as an operating agreement between members outlining ownership rights and responsibilities within the company. Additionally, LLCs are subject to self-employment taxes like sole proprietorships, so it's important to consider this when determining whether an LLC is right for your business.
Partnership
A partnership is a legal arrangement between two or more individuals in which each partner shares profits, losses and control over the business operations. Generally speaking, partners have unlimited personal liability for all debts incurred by the partnership but there are certain types of partnerships that provide limited liability protection such as Limited Liability Partnerships (LLPs). Partnerships offer flexibility in terms of management structure but are subject to self-employment taxes like sole proprietorships so this needs to be taken into consideration when assessing what entity structure makes sense for your business.
Corporations
A corporation is a separate legal entity from its owners that offers limited liability protection for shareholders in exchange for complying with certain regulations including filing annual reports with state authorities and issue shares of stock to shareholders who then elect board members who manage day-to-day operations on behalf of shareholders. Corporations also offer tax benefits such as allowing businesses to deduct certain expenses which can result in lower overall taxes owed. However, corporations can be costly and complicated due to their required paperwork and ongoing filing requirements so it’s important to weigh these factors against any potential savings before deciding if this type of entity makes sense for your particular situation.
As you can see, there are many factors involved in choosing an entity structure for your business including personal liability exposure, tax implications, cost considerations and ease of formation/maintenance requirements among others. Weighing these factors carefully will help ensure that you select an entity structure that best fits your specific needs now as well as down the road as your business grows or changes direction over time. Ultimately, selecting an appropriate entity structure should involve careful consideration on multiple fronts so be sure to consult a qualified professional when making this important decision.
For more information and help with choosing the right entity for your business and formation, contact Curington Law, LLC at 312 803-1755 or online.
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