Choosing the Correct Business Structure for Your New Company
The following guide outlines the most common business entities as well as the advantages and disadvantages of each entity. The main areas of concern are personal liability, tax liability, and structure flexibility.
Sole ProprietorshipThe advantages of a Sole Proprietorship are 1) low-cost, 2) easy set-up and exit, and 3) simplictly in tax reporting and the ability to deduct health insurance. The disadvantages are 1) no separation of business and personal assets, 2 ) personal liability for all liabilities of the company, 3) business ends with death of sole proprietor, and 4) difficulties in raising capital or obtaining lines of credit.
PartnershipThe advantages of a Partnership are 1) easy to form, however, the partners should draft a Partnership Agreement, 2) tax benefits for General Partnerships, and 3) strategic vision. The disadvantages are 1) unlimited liability for each partner depending on the form of Partnership, 2) exit strategy and 3) the life of the Partnership upon death of a partner.
Limited Liability CompanyThe advantages of a Limited Liability Company are 1) liability protection of a corporation, 2) no double taxation for members 3) flexibility in structuring member shares and 4) management flexibility. The disvantages are 1) inflexibility of transfer of management ownership, and 2) cost and ongoing expense.
CorporationThe advantages of C-Corporations are 1) limited liability, 2) perpetual existence, 3) separation between ownership and management and 4) unlimited amount of potential shareholders. The disadvantages are 1) complexity and 2) double taxation. The advantages of S-Corporations are 1) limited liability, 2) pass through taxation, and 3) credibility. The disadvantages are 1) formation and cost, 2) less flexibility in allocating income and cost.