There are different advantages and disadvantages for each company type. In this post, we'll walk you through what to consider when deciding on how to structure your business. We'll also follow up with a series of posts focusing each on a specific entity type and it's advantages and disadvantages from tax and legal perspectives.
Areas to Consider:
First and foremost, when considering types of business entities for your company, you'll need to consider the following areas:
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Effort
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Tax
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Documentation
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Control
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Funding
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Liability
Effort:
Some types of business entities don't require any formal action to form aside from appropriate licensing and permits. Others, on the other hand, require more effort regarding some of the following:
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Establishing a Business Name
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Business registration
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Bylaws
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Operating Agreements
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Employment
Tax:
Regarding tax, the following areas are some of those affected by business type:
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Federal, State, & Local Taxes: Some business structures are viewed as separate tax-paying entities while others aren't.
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Income tax: Some business types don't pay income tax, rather the income tax is paid by the owner, members, or partners.
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Employees: Depending on business structure employees may pay a portion of social security, medicare, and income taxes.
Documentation:
A business may or may not be required to file a separate return from owners' personal returns. Furthermore, the required forms vary depending on type. For example;
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Schedule C on Form 1040 - For a sole proprietorship, or single member LLC.
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Schedule K-1 (Form 1065) - For a partnership or Partners in an LLC.
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Form 8832 - For an LLC to elect a classification
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Form 1120 or 1120A - For Corporations.
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Form 2553 - For an S Corporation (S-Corp) or and LLC combined with an S-Corp.
There are different amounts of documentation required for different types of business. It's therefore, necessary to consider the time or cost allotted for the required legal and organizational documents and filings.
Control:
This may be common sense, however, it's still worth noting that as a sole proprietorship you'll have complete control over business decisions whereas such control will vary with other business structures.
Funding:
A sole proprietorship will have difficulties raising money as they're not allowed to sell stocks like corporations. While partnerships, for instance, can split investment between partners. So it's importing to take into consideration funding needs when choosing an entity type.
Liability:
A business type that does not legally separate the business from the owner leaves the owner personally responsible for the business's debts and obligations. Furthermore, the owner maintains the risk of any liabilities incurred by employees. The more legal separation there is between owner(s) and business the less liability the owner(s)'s responsible for.
