Understanding which structure is best for your business.

Starting a new business is both exciting and overwhelming. Beyond coming up with that one great idea upon which you will build your business, the two most important considerations are choosing an organizational structure, and establishing business credit. It is highly recommended for protection, privacy, tax, business credit building, and overall credibility reasons to form a corporation or LLC as a business owner. Below is a list of the main structures to help better educate you on making the right choice for your business.

Sole Proprietorships and Partnerships

These two organizational structures are similar in nature, and are used sometimes for very small businesses. In a proprietorship, there is a single owner; a partnership has two or more owners. This structure does not separate liability between the company and the individual owners, but may be suitable in situations where the business is expected to remain very small and credit needs will be minimal.

Advantages of Sole Proprietorships and Partnerships

• Initially less expensive to form than a corporation or LLC.
• Easier to maintain and operate.

Disadvantages of Sole Proprietorships and Partnerships

• Lack of credibility
• Offers no asset protection
• Owner personally liable for lawsuits filed against business
• High risk for audit and limited tax deductions
• No privacy or identity protection
• No separate line of credit
• Restricted growth ability

Limited Liability Company (LLC)

The LLC is a separate business entity from its owners, unlike the sole proprietor.A LLC is attractive to small business owners because it combines the ease of pass through taxation offered to the sole proprietor or partnership, with the limited liability offered to the corporation. Many refer to the LLC as have all of the benefits of the other existing structures without the drawbacks.

Advantages of the Limited Liability Company (LLC)

• Provides excellent asset protection, tax savings and credibility.
• Separate legal entity.
• Most popular business structure today for small business owners.
• Taxation flexibility, increased deductions and savings.
• Provides assets protection, privacy protection, identity protection.
• Ability to build business credit.
• Respected by other business viewed as credible.
• Easy to operate and maintain.
• One person can own and operate a LLC or other business entities.

Disadvantages of the Limited Liability Company (LLC)

• Requires more expertise to establish than a sole proprietorship.
• More complicated to operate than a sole proprietorship or partnership.

Corporations (C-Corp)

A corporate structure is best suited for situations where there may be multiple stakeholders, and some growth is expected. Both types of corporate structures ("S" corporation and "C" corporation) provide a clearer separation between the owners and the corporation, which becomes a separate entity. Commonly used with very large companies for it’s ability to raise capital through the sell of stock.

Advantages of Corporation (C-Corp)

• Provides asset protection and credibility.
• Separate legal entity.
• Ability to build business credit.
• Respected by other business viewed as credible.
• Ability to raise capital through the sell of stock

Disadvantages of a Corporation (C-Corp)

• Double taxation once a business level then a personal level
• Difficult to maintain and operate.
• Requires the completion of many formalities through out the year.

S-Corporation

An S-Corporation originally starts out as a C-Corporation. It offers limited liability status and is typically very popular among small business owners. A C-Corporation becomes a S-Corporation upon filing an application with the IRS.

Advantages of a S-Corporation (S-Corp)

• Provides asset protection and credibility.
• Taxation flexibility, increased deductions and savings.
• Separate legal entity.
• Ability to reduce FICA taxes.
• Ability to build business credit.
• Respected by other business viewed as credible.
• Ability to raise capital through the sell of stock.

Disadvantages of an S-Corporation (S-Corp)

• All shareholders must be US Citizens.
• Entity cannot have over 100 shareholders.
• Additional filing required to obtain S-Corp Status.
• Difficult to form and operate.

To learn more about the best structure for your business download our free guide (Book Graphic)