Million things one needs to keep in mind while starting a business. The owner needs to handle things like, raising funds, hiring staffs, fabricating marketing strategies, paying salaries, etc. However, before all these, you need to know the type of business entity structures and what is entity formation.
Your sole decision can influence your legal and financial sides of the business. The taxation of a business largely depends on the entity type of your business. Based on the entity type you can also get loans and can ask the investors to raise the money for the business.
In this post, the four business entity types will be discussed with their pros and cons, which are generally selected by the small business owners. It will help you to know how to choose the right business entity?
These are as follows:
- Sole proprietorship
- Limited Liability Company (LLC)
A sole proprietorship is a simple business entity where there will be a sole owner or operator of the business. In case you are launching a business on own, it will automatically come under the sole proprietorship entity formation. There is no need of registering the business with the state, but only the owner has to get the local business permits or licenses needed for the injury.
- Easy to start
- No corporate formalities or paperwork
- You can deduct most business losses on your tax return
- Easy to file the tax returns by simply filling Schedule C-Profit or Loss from business to your income tax return
- Being the sole owner, the liabilities & debts depends on you
- Difficult to get loan or investors
- Hard to build business credit without registering the business entity
A C-corporation entity formation is a completely separate legal entity without having any connection with the owner of the business. The entity is controlled by the Shareholders (the owners), a board of directors, and officers. However, a single person can play all the roles. So, without any hassle, you on own can handle all these.
- No personal liability of the owner for the debts and liabilities
- Gets more tax deduction than other types of entities
- The owner usually pays low self-employment tax
- The stock option enables you to raise more funds
- Expensive to create such an entity, difficult for startups
- Double taxation as the company pays tax on the corporate tax return and individual shareholders on personal tax returns
- Owners won’t be able to deduct business losses on their tax return
The S-corporation preserves the limited liability but offers a pass-through entity to the owners for tax matters. No corporate-level taxation is there in the S-corporation.
- Owners are not personally liable for company liability and debts
- No corporate taxation and no double taxation
- Creation of an S-corporation is a costly affair. It is difficult for a startup with limited capital to go for S-corporation entity formation.
- Limits are more in issuing Stock in S-corporation than of C-corporation
- Needs to maintain all the corporate formalities
Limited Liability Company (LLC)
It is probably one of the most preferable entity formations among the business owners. LLCs offer limited liability protection, but the amount of paperwork and other requirements are very less. Another important aspect of LLC is that it offers you to choose how IRS will tax you such as a corporation or a pass-through liability.
- No personal liability for the debts or liabilities of the business
- Option to choose how IRS will tax you such as a corporation or a pass-through liability
- Very fewer corporate formalities to follow
- Expensive to create the LLC in compare to any other entity formation
Over in this post, four of the most used business types are being discussed. In case, you are looking for any advice you can get connected with us.
However, if have to smooth to say, please feel free to comment. It will be great to from you.