What Type of Business Is Right For You?


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When starting a for-profit business, you will have to consider what type of business structure your business will be. There are many business structures but here are the four main ones: Sole Proprietorship, Partnership, Limited Liability Corporation (LLC) and Corporation. Each one has its own advantages and disadvantages. Read more below to find out each. Brought to you by fundera.


Sole Proprietorship


This is the simplest form of business entity. With sole proprietorship, one person is responsible for all of a company's profits and debts.

This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.


Pros:

  • Easy to start up (no need to register your business with the state).

  • No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.

  • You can deduct most business losses on your personal tax return.

  • Tax filing is easy—simply fill out and attach Schedule C-Profit or Loss from Business to your personal income tax return.

Cons:

  • As the only owner, you’re personally liable for all of the business’s debts and liabilities—someone who wins a lawsuit against your business can take your personal assets (your car, personal bank accounts, even your home in some situations).

  • There’s no real separation between you and the business, so it’s more difficult to get a business loan and raise money (lenders and investors prefer LLCs or corps).

  • It’s harder to build business credit without a registered business entity.

Partnership


This entity is owned by two or more individuals. There are two types: general partnerships, where all is shared equally; and limited partnerships, where only one partner has control of its operation, while the other person or persons simply contribute to and receive only part of the profit. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity's funding and liability structure.


This entity is ideal for anyone who wants to go into business with a family member, friend or business partner, like running a restaurant or agency together. A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.


Pros:

  • Easy to start up (no need to register your business with the state).

  • No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.

  • You don’t need to absorb all the business losses on your own because the partners divide the profits and losses.

  • Owners can deduct most business losses on their personal tax returns.

Cons:

  • Each owner is personally liable for the business’s debts and other liabilities.

  • In some states, each partner may be personally liable for another partner’s negligent actions or behavior (this is called joint and several liability).

  • Disputes among partners can unravel the business (though drafting a solid partnership agreement can help you avoid this).

  • It’s more difficult to get a business loan, land a big client, and build business credit without a registered business entity.


Limited liability company (LLC)


A limited liability company is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership. Under an LLC, members are protected from personal liability for the debts of the business, as long as it cannot be proven that they have acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.


A limited liability company offers more protections and separations to businesses than sole proprietorships and is a combination of a corporation and partnership. Your personal assets and company assets are separated in most cases, and your profits and losses are not taxed at the corporate level.


Pros:

  • An LP is a good option for raising money because investors can serve as limited partners without personal liability.

  • General partners get the money they need to operate but maintain authority over business operations.

  • Limited partners can leave anytime without dissolving the business partnership.


Cons:

  • General partners are personally responsible for the business’s debts and liabilities.

  • More expensive to create than a general partnership and requires a state filing.

  • A limited partner may also face personal liability if they inadvertently take too active a role in the business.

Corporation


The law regards a corporation as an entity separate from its owners. It has its own legal rights, independent of its owners – it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks.


There are several types of corporations, including C corporations, S corporations, B corporations, closed corporations and nonprofit corporations.


C corporations, owned by shareholders, are taxed as separate entities.


S corporations avoid this double taxation, much like partnerships or LLCs. Owners also have limited liability protection.


B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society.


Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection.


Nonprofit corporations exist to help others in some way and are rewarded by tax exemption.


Pros:

  • Owners (shareholders) don’t have personal liability for the business’s debts and liabilities.

  • C-corporations are eligible for more tax deductions than any other type of business.

  • C-corporation owners pay lower self-employment taxes.

  • You have the ability to offer stock options, which can help you raise money in the future.

Cons:

  • More expensive to create than sole proprietorships and partnerships (filing fees range from $100 to $500 based on which state you’re in).

  • C-corporations face double taxation: The company pays taxes on the corporate tax return, and then shareholders pay taxes on dividends on their personal tax returns.

  • Owners cannot deduct business losses on their personal tax return.

  • There are a lot of formalities that corporations have to meet, such as holding board meetings and shareholder meetings, keeping meeting minutes, and creating bylaws.



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