You’ve come up with the idea, researched the market, and completed a detailed business plan for your new company. Next step: choose the business entity that makes the most sense for you and your new operation.
The entity you choose will have an impact on your personal liability, tax classification, ability to raise money, and ability to offer ownership to employees or others in the future. You’ll want to consider the options and choose wisely, taking into account not only today’s needs but also those for the future.
Here are the four main types of business entities, along with advantages and disadvantages of each form:
- Sole proprietorship – this is the simplest and most common form of business entity. Sole proprietorships have one owner, who can be held personally responsible for any debts or obligations of the business. Income and losses are passed through to the owner, who is taxed on the owner’s personal return. Sole proprietorships are easy to set up. In Georgia, a sole proprietorship is not required to obtain a general business license. Depending on the business activities, however, a sole proprietorship may need certain specific permits or licenses.
- Partnership – a partnership is a separate business entity owned by two or more individuals. It does not pay taxes. Instead, owners pay taxes based on their interest in partnership profits. A general partnership does not offer liability protection. Partners can be personally liable for partnership debt. Alternatively, partnerships can be set up to provide limited liability protection for certain partners.
- Corporation – a corporation is a legal entity that is separate from its owners, the stockholders. It’s managed by a board of directors and pays its own taxes. The corporate entity, rather than the owners, is legally liable for its actions. Corporations have regular reporting and record-keeping requirements.
While there are several types of corporations, the two most common for small businesses are the C corporation and the S corporation:
- C corporation – these corporate structures have unlimited life and the ability to raise funds through the issuance of stock. Owners can transfer their stock or sell it to others. C corporations can also provide ownership opportunities to employees through stock and offer stock options as employee incentives. Businesses raising funds through venture capital usually form a C corporation to limit tax flow-through to owners and provide limited liability for investors. A disadvantage to this form of business entity is double taxation: the corporation is taxed on its profits, and shareholders are taxed on their dividends.
- S corporation – this form of corporation is limited to one class of stock with no more than 100 US individuals (citizens or residents) as shareholders. S corporations generally do not pay taxes but instead pass through income to owners, who are then taxed at their personal tax rate. Like with a C corporation, S corporations have unlimited life and offer owners limited liability protection.
- LLC –An LLC, or limited liability company, offers the benefits of both a partnership and a corporation. LLCs are generally taxed as partnerships, in that profits and losses flow through to the owners, who pay taxes at their personal rate. But, LLC owners enjoy limited liability protection from the company’s debts and legal issues, as they do in a corporation.
When evaluating which entity is best for you and your business, it is important to consider the way you want the business to be taxed and whether you want personal liability for debt and legal matters. Also take into account whether you want to share ownership or operate on your own. The size of your operation also plays a part in your decision. If your goal is to operate a business on your own, then a sole proprietorship might be the simplest option. If you envision a widely held, larger entity, then a C corporation could be the best choice.
Your InPrime Legal Team
Let our team help you with determining business entity and structure. To learn more about how our experienced attorneys can help you set up your business and assist as you grow, contact InPrime Legal online today or call us at 770-407-8889.
Disclaimer: This blog should not be used as a substitute for competent legal advice from one of our licensed attorneys.