One of the first questions a new business owner must consider is what type of entity structure is best for their particular business. As if it isn’t stressful enough with all the decisions needed to be made when you first start your business, deciding what business entity can often be very overwhelming. It is beneficial to seek out a professional’s advice in helping to analyze which structure is the right fit.
PacWest Accounting assists many new businesses in making those often difficult decisions in the beginning stages. Here is a brief outline of the most popular types of entity structures
1. Sole Proprietorship: The most popular entity structure among small business owners; it is the most basic of the entities and meant solely for a single individual opening a business. Sole proprietorships have limited life, meaning that the business ceases once the owner is no longer alive. It is the easiest to file for a license, and a major benefit is single taxation, meaning that profits flow-through directly to the owner’s personal tax return.
However, the owner of the business assumes unlimited liability, meaning that he or she is personally liable for any debts the business might face. Creditors and individuals can go after your personal assets if business assets are insufficient in fulfilling obligations. This factor makes sole proprietorships the riskiest business model an entrepreneur can assume
2. Partnerships are essentially sole proprietorships for businesses where there are two or more owners. Unlimited liability is still present, and for the most basic partnership all owners assume equal liability. Partnerships also possess limited life, so transfer of ownership after a partner’s death can become logistically difficult.
3. Corporations are owned by shareholders of a company. Managers control day-to-day operations of the company, and may or may not hold company shares. One of primary reasons to incorporate is the benefit of limited liability. Corporations are seen as living entities, and therefore liability is limited to the corporation itself. Because the corporation is an entity, it assumes unlimited life, and shares can easily be sold or transferred.
Corporations are not perfect, though. The largest disadvantage of forming a corporation is what is known as double taxation. The corporation pays taxes based on its profits just as a sole proprietorship or partnership does. Those profits are then distributed to shareholders in the form of dividends. Dividends themselves are then also taxed.
4. S Corporations are corporations that elect to pass corporate income, losses, deductions and credit through to the shareholders and assessed tax on their individual income tax rates. One of the greatest benefits is the avoidance of the double taxation of corporate income. In order to qualify as an S corporation, the business must be a domestic corporation, have no more than one hundred shareholders and issue only one class of stock.
5. A Limited Liability Company (LLC) is a business structure allowed by state statute and is popular because of the limited personal liability for the debts and actions of the LLC similar to corporations. Most states do not restrict ownership so members can be individuals as well as corporation, other LLC’s and foreign entities.
If you have more questions on which entity is best suited for your company, please contact us and we can assist you in finding the form to best serve you and your company’s needs.
