Which Business Structure Is Right for You?
January 16, 2017
By Timothy Schuster, CPA
One thing to consider when starting your business is the type of structure to use. This issue has both tax and legal implications for the business and its owners. Here are several formats worth noting:
- Sole Proprietorship – An unincorporated business with one owner who pays personal income tax on profits from the business.
- Partnership – Two or more entities contribute resources to the business and share in the outcomes. A partnership must report its income, deductions, gains and losses from the business’s operations. The business does not pay income tax, rather it passes through any profits or losses to its partners.
- Corporation – An independent legal entity where shareholders pay for shares of stock (ownership) in the company. The corporation, not the shareholders, is legally liable for any consequences incurring from the business’ activities. Most corporations must register with the IRS and pay federal, state, and, in some cases, local taxes.
- S Corporation – Corporations that choose to pass income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
- Limited Liability Company (LLC) – Combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs must file as a corporation, partnership or sole proprietorship.
- C Corporation – Considered separate entities from their owners, C corporation income is taxed at the corporate level and again when distributed to owners. Designed to limit owners' legal and financial liabilities.
- Limited Liability Partnership (LLP) – Has some elements of a partnership and a corporation. Some or all partners have limited liabilities. One partner is not responsible or liable for the actions of another partner.