SmallBusinessNewz

Which one is best for your business?

Setting up the legal structure for your business is a task that can be rather difficult. What ultimately determines your decision is what you want for your business.

Do you want to be the only owner and decision maker? Or would you rather share the responsibility and have a partner? Or maybe you prefer a corporation or a limited liability company.

Because it can be confusing, we’re going to break it down for you and hopefully help you gain a better understanding of the business organizational structures.

1. Sole Proprietorship

Advantages

- Only one owner
- Easy to set up and maintain
- Owner makes all decisions and receives all the profits
- Primariliy independent from government control and requirements

Disadvantages

- Your personal assets are at risk (in the case of a lawsuit)
- No tax benefits
- Difficulty raising capital

2. Partnership

General Partnership

Advantages

- Shared financial commitment
- Can be formed without a written agreement
- No filing requirement with the state

Disadvantages

- Each partner is personally liable for business debts and liabilities
- Each partner may also be liable for debts incurred, decisions made, and actions taken by the other partners
- Partners may have different visions or goals for the business

Limited Partnership

Advantages

- Each partner is only liable for his/her own investment
- Allows general partners (GP) to use their expertise, manage business, and make key decisions
- Limited partners can leave business without the breaking up the limited partership

Disadvantages

- More filings, formalities, and state requirements with limited partnerships
- General partners assume personal liability

3. Corporation

Advantages

- Limited liability of corporation’s debts
- Personal assets are not at risk
- Pays taxes separate and apart from its owners
- Owners can become employees thus gaining eligibility for reimbursement or deductions of many expenses including health and life insurance
- Set management structure; elected board of directors set corporate policy
- Shares are freely transferrable
- Exists unless shareholders decide to dissolve it or merge with another business

Disadvantages

- It costs to incorporate
- Formalities to follow (lots of paperwork requirements)
- States provide a mechanism for dissolving a corporation and liquidating its assets. A corporation’s officers and directors are responsible for dissolving the corporation (voluntarily or involuntarily).
- Potential double tax consequences

4. Limited Liability Company (LLC)

- Combination of the pass-through taxation of a sole proprietorship and general partnership but with the limited liability of a corporation.

Advantages

- Provides personal liability for members
- Do not have to meet requirements and formalities of a corporation
- Flexible management; draw up own contract
- Various classes of interest (issue various types of stock)

Disadvantages

- Some states require a franchise tax or capital values tax on LLC’s; essentially, this tax is the fee the LLC pays the state to have limited liability.
- Some states treat LLC’s like a corporation, sole proprietorship, or general partnership for liability purposes
- Outside U.S., taxing jurisdictions could treat U.S. LLC as corporation
- File annual reports with state
- Most states require an operating agreement
- LLC can only have 2 of the 4 characteristics of corporation (limited liability, continuity of life, centralized management, and free transferable interests.)

For more information, watch the SmallBusinessNewz video.