Beginning a business is a lot of options. What is the industry? What is the location? What will you sell? Another question that isn’t as obvious is what kind of business entity will you select? You could choose to create a sole proprietorship or partnership or even incorporate the form of a corporation. Below, I’ve explained what they are, how to differentiate from the various types of business, and the advantages and disadvantages of each. Let’s begin by discussing…
Sole Proprietor
The term “sole proprietorship” refers to a Sole Proprietorship is, an unincorporated business that is owned by a single individual.
Pros –
Simple to complete. Contact your local clerk’s office in the city or county.
You receive all earnings.
You control the entire process. You are the sole decision-maker.
Simple accounting tax. The tax on income is based on a personal basis, and there is no need to make an account balance sheet.
Cons –
Unlimitable liability. You are responsible for the debts of the business. Your personal assets (such as your car and house) are vulnerable.
The business is you. If you don’t work, you don’t get paid, even if you are ill.
Limits to your budget or skill set, knowledge, and network.
It’s possible to be lonely if you do not engage someone.
Partnership
A Partnership is an unincorporated entity run by two or more persons, usually less than 20.
Pros –
Additional skills, knowledge connections, ideas, contacts, and capital. This creates possibilities.
– Sharing responsibility.
It is easy to install.
Accounts are kept private.
Cons –
Unlimitable liability. Financial assets and personal assets are in danger.
Conflicts and potential disagreements.
– Profits from shares.
Control shared.
Limited Liability Company (LLC)
The Limited Liability Company (LLC) is a type of business entity that is permitted by the law of the state. It’s a mix between proprietorship/partners and corporations.
Pros –
– Avoids double taxation.
– Limited Liability. You are only liable for the capital you put into the business.
A lower number of legally required requirements than a company for board meetings and simple to establish.
Cons –
Certain companies aren’t able to be LLCs. For instance, insurance companies and banks. Certain states prohibit specific industries from forming LLCs, for example, accountants and architects in California.
Some states have special tax rates for LLCs. Consult with an accountant prior to making a decision about an LLC.
LLCs aren’t able to be taken as public.
S Corporation
S corporations are companies that choose to transfer corporate profits loss, deductions, and credits through to shareholders for federal tax reasons. However, not all companies can be converted to S Corporations.
Pros –
Limited liability. S Corporations are distinct entities, and therefore the owners aren’t responsible for the debts of the business.
It is easy to sell since it’s an independent entity.
Tax savings. Shareholders pay taxes at a lower rate than employees.
Some of the expenses you incur can be deducted in the form of a business expense.
Cons –
Legal requirements are more stringent. For instance, there should be scheduled shareholder and board meetings and minutes maintained.
Strict shareholder rules.
It cannot have subsidiaries.
– Shareholder-employees with more than 2% ownership lose tax-free fringe benefits.
The stock is restricted to a single type of stock, which restricts freedom of distribution of profits in contrast to C Corporations.
Go to the IRS website for more details and requirements for S-Corporations.
C Corporation
A-C Corporation is a distinct legal entity that is not a part of the shareholders (owners) in contrast to sole proprietorships and partnerships. It is, therefore, able to sue, obtain a lawsuit or pay taxes, and also sign contracts for itself.
Pros –
Medical payments are deductible.
It is easy for investors to invest. C corporations can also be publicized, which is appealing to investors.
– You can save your profits for expansion in the future with a lower tax rate.
– Limited Liability
– Unlimited shareholders
– Simple to market
Can own subsidiaries
Cons –
A lot of legislation and papers.
The double taxation (corporate as well as personal) since the business is an independent entity.
– Accountants and solicitors would probably be required.
We’re there. It’s your turn to evaluate the advantages and disadvantages of each one and make a decision based on your own situation. What is right for you may not be the best choice for another person, and you should consider your desires and needs before making a choice. Additionally, I strongly suggest seeking out the guidance of a licensed solicitor and accountant before making a definitive decision and proceeding. Have a great time.
