Now that you’ve decided to launch your own business, have you decided on the business entity? If not, below please find a simple “pros” and “cons” list to assist you.
Sole Proprietorship
This is the simplest business entity because you are not required to file any paperwork or register your business with the state.
| Pros | Cons |
|---|---|
| Easy and convenient to start | Exposes your personal finances to an unlimited amount of risk! |
| No costs to register with the state | It may be difficult for you to obtain a business loan or build credit |
| Privacy since you’re not registered anywhere | |
| Simplifies your taxes because your business profits/losses are included with your personal tax return | |
| Easy to convert into another type of business entity (such as an LLC, C-Corp in the future) |
General Partnership
Partnerships are formed when two or more owners create a business. The business partners agree to share assets and liabilities. There is no legal distinction between a general partnership and its owners. If you choose this business structure, it’s important to have a written agreement detailing how you and your partner will make decisions, split profits and losses, allow other partners to buy-in or wind down the business.
| Pros | Cons |
|---|---|
| Easy and convenient to start | Generally, each partner is responsible for the actions of the other partner (even if you didn’t know about your partner’s negligent behavior)! |
| No costs to register with the state | It may be difficult for you to obtain a business loan or build credit |
| Privacy since you’re not registered anywhere | |
| Simplifies your taxes because partners include their share of business profits/losses on their individual tax returns |
If you are hesitant about going into business with a partner and you simply want to “try them out” first, you may want to consider forming a Joint Venture Agreement for a particular project. Schedule a consultation with us to find out more.
Limited Partnerships
Unlike a general partnership, a limited partnership is registered with the state. In this business structure, there are two types of partners – general and limited (also known as “silent” partner(s)). General partner(s) control the day-to-day, and the limited partner(s) act as an investor(s) and generally has limited liability.
| Pros | Cons |
|---|---|
| General partner(s) get access to funds from one or more silent partner(s) | You must file an annual report and pay a fee to the state in which you register |
| Allows limited partner(s) to limit liability and exit the business without dissolving the partnership | Generally, each general partner is personally liable for the business’s activities and debts |
| Simplifies your taxes because partners include their share of business profits/losses on their individual tax returns | If the limited partner becomes involved in the day-to-day, they may be held personally liable for the business’s activities and debts |
Limited Liability Partnerships (LLP)
Like the limited partnership, the LLP is also registered with the state. There’s only one class of partners – limited. Therefore, none of the partners have personal liability for the business. This type of business structure is usually limited to certain professions like lawyers, accountants and doctors.
| Pros | Cons |
|---|---|
| Limited liability for all partners against claims against the business & the other partners | You must file an annual report and pay a fee to the state in which you register |
| Simplifies your taxes because partners include their share of business profits/losses on their individual tax returns | LLP terminates if one partner withdraws from the business |
Corporations
A corporation exists separately from its owners who are called “shareholders.” Corporations must name officers, such as a president, and secretary, but one person can serve all the positions.
There are 2 types of corporations – C Corporations and S Corporations, and they each come with different pros and cons which are discussed below.
C Corporations
| Pros | Cons |
|---|---|
| Can have an unlimited number of shareholders who can be U.S. or non-U.S. residents | Taxed 2x – at the corporate level and you, as the shareholders taxed on any salary or dividends you pay yourself |
| The shareholders or owners enjoy limited liability for claims against the business and its debts | Many legal requirements such as holding board meetings, maintaining meeting minutes and corporate bylaws, and filing an annual report |
| Privacy – shareholder names are typically not public | Usually costs more to register than other business entities |
| Transfer of ownership can be easily done through a sale of shareholder stock | |
| Allows more tax deductions than other types of business entities |
S Corporations
An S Corporation gives you the limited liability of a C Corporation, but the tax structure & advantages of a solo proprietorship or a general partnership. You can change from a C Corporation to an S Corporation by filing IRS Form 2553 (Election by a Small Business Corporation).
| Pros | Cons |
|---|---|
| No income tax, instead each shareholder includes their share of the profits or losses from the business on their personal tax returns | Many legal requirements such as holding board meetings, maintaining meeting minutes and corporate bylaws, and filing an annual report |
| The shareholders or owners enjoy limited liability for claims against the business and its debts | No more than 100 shareholders |
| Privacy – shareholder names are typically not public | |
| Transfer of ownership can be easily done through a sale of shareholder stock | |
| It simplifies taxes because you can include any profits or losses on your personal tax return |
Limited liability companies (LLC)
Owners are called “members.” LLCs are registered with the state, and you must file a report and pay a fee every year. LLCs are organized by an Operating Agreement that defines the membership, management, and income distribution of the company. Members can choose to be taxed as a corporation or a “disregarded entity” meaning you can include pass-through income on your personal tax returns. If there are multiple members in the LLC, they can choose to be taxed like a general partnership or like a corporation.
| Pros | Cons |
|---|---|
| Can be taxed as a disregarded entity and include pass-through income on personal tax returns | It can be costly to register (and create an Operating Agreement) |
| The members or owners enjoy limited liability for claims against the business and its debts, as well as claims against any other LLC members | |
| Flexible organizational rules – no formal officers or annual meetings are required | |
| It simplifies taxes because you can include any profits or losses on your personal tax return (if you select to be a disregarded entity) | |
| Unlimited number of members |
