A few folks had asked me about the different types of business structures that can be set up so I thought it may prove helpful to develop a primer of sorts. However, I am not a lawyer nor do I play one on television. All information contained in this post (and this blog) is based on my experience and a few entrepreneurship courses I took at b-school. Without a doubt you should ask a lawyer about any and all business structure questions.
Sole Proprietorship
Pros:
Easiest business structure to set up and no legal oversight necessarily needed.
Any income you earn from a business of this type is reported as part of your personal income tax return.
Any expenses from this business can be deducted from your personal income tax return.
Cons:
There’s no barrier between you and the business. Therefore, you are held personally liable for debts and any legal liability associated with the business.
Limited Liability Corporation
Pros:
Only a few hundred to set up (cost varies for state filings)
Ability to have as many shareholders or partners as necessary.
Can create different percentages and levels of shareholders as needed.
There’s a level of protection between your personal life and the business so all business debts and legal issues are the domain of the business and cannot be assessed on the shareholders personally.
Can change to an S Corp down the road though it may be costly.
Cons:
At the end of the year any profits are distributed among the shareholders. This can be seen as a negative if you’d like to keep cash in the business for upcoming expenses.
S Corporation
Pros:
Limited liability similar to an LLC which protects personal assets
Profits flow to shareholders – though I *believe* that you can leave some money in the business.
Disadvantages:
Slightly more expensive to file and legal representation is highly recommended
More stringent rules for how the company is goverened and reports itself.
C Corporation
Let’s be honest, if you’re filing as a C Corporation (think Fortune 500) then you’re well ahead of me!
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1 comment:
The one structure that you did not detail is a General Partnership. It operates much like an LLC, but liability is unlimited -- bascially LLC taxation with corporate liability. The link below is a reasonably good comparison between the alternatives.
http://www.allbusiness.com/524-1.html
One other note, there are state specific issues, especially in California, that you should consider before deciding on a organizational form. Again, always consult with counsel to determine what is best for you.
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