There are many considerations for those wishing to begin a new business venture. One of them is choosing the right structure; you may not be sure which entity to choose. There are advantages and disadvantages to any selection.
Whether you are selling products or providing a service, it is crucial you choose the right business structure for your business; this decision can have a profound effect on how much you pay in taxes, investments in the business, your liability and your financial security. If you are not sure or comfortable with choosing an entity for your business always consider legal or Professional help.
Choosing the Right Entity
Choosing the right entity involves knowing the differences between them. For example, you wish to choose a partnership or maybe an s corporation. However, unless you know their workings, it may be near impossible to make a decision. Here are some of the entities that you may need to choose from.
This means that one person runs the company. There is only one owner and that owner is entitled to all of the company profits. On the other hand, the owner is also liable for all losses and legal issues.
This is a situation where the company is owned by two or more people. There is usually an agreement made on who does what, and how profits are shared. If there are legal issues the partners are liable on a joint and separate basis. For example, one partner can be sued over a specific legal matter, of the company.
An LLP or limited liability partnership is designed to protect the individuals. Partners in a limited liability partnership are only liable for their share or investment in the partnership. In most cases, LLPs will not run the day to day operations or manage the company. That will be done by the general partners in the business.
When a company incorporates, it becomes a separate legal entity. Corporations can own land, property and engage in lawsuits. If a corporation is sued, the personal assets of the owners are safe, as the corporation is separate.
A corporation may be public, by selling stocks, or it may be private, with private ownership. There are two distinctions in corporate taxation choices. Under normal circumstances a corporation is a C corporation. When a company incorporates, they usually have a specific deadline to file for S corporation status. However a C corporation can file for S corporation status at a later date too.
An S corporation is not treated as a separate entity as far as tax purposes. The owners are responsible for profits on an individual basis. Profits and losses are divided among the shareholders or owners. They claim income and losses on their individual income tax forms.
Differences between C and S Corporations
S corporations enjoy the advantage of only being taxed one time. C corporations are taxed as corporate entities and shareholders and owners are also taxed.
S corporations may only have 75 owners as C corporations are unlimited. They may also only issue one class of stock and C corporations are unlimited.
If you are wondering how to start a business, you will notice many entity options. Sole proprietorship is owned by one person. Partnerships are owned by many and LLPs offer more legal protection than normal partnerships. If you form a corporation, it will be a separate legal entity. People can sue the corporation, but not you. The main difference between C and S corporations is taxation. S corporations are not taxed as corporations, as the owners are taxed individually.