business structure may turn out to be a defining moment for the company’s legal and financial constitution. This choice can affect so many things about the business, the tax responsibilities of the business, how much liability is expected from you as an individual, and the degree of difficulty in getting investors or lenders on board. Each option is also accompanied by different benefits and drawbacks which will influence your daily functioning and strategic ambitions.
Below, we simplify five structures that have become quite common: LLC (Limited Liability Company), S Corp (S Corporation), C Corp (C Corporation), Sole Proprietorship, and Partnership. These structures are appealing for the different advantages they present that range from personal liability protection to tax options all what is applicable or easy to incorporate.
With a better understanding of these structures, you will appreciate your decision in the long run because it is not simply about meeting your immediate business needs but also future business needs that will bring along success to the company from the beginning.
LLC (Limited Liability Company)
What is an LLC?
An LLC is recognized as a great choice because it blends the advantages of partnership and corporation in that it protects the owners from personal liabilities while allowing a measure of flexibility. In this regard, this hybrid form is considered ideal for business owners who want to achieve management simplicity while at the same time having the legal cover.
Benefits
Limited Liability: Owners (or members) do not take on the debts or obligations incurred by the business’s company. This means that their properties are safe from legal or financial distress, which could incur against the business rather than the owner.
Tax Benefits: Earnings can be declared and taxed through the owners return thus there will be no problem of double taxation which exists in some structures of the company. In addition, LLCs and corporations can also be selected if this is advantageous for them.
Less Paperwork: Liabilities that are apparent in corporate bodies are in LLC structures to a last extent thus they are simple to run which appeals to small business holders who wish to shift their focus towards expansion rather than processes.
Who Should Choose an LLC?
Small Businesses: Preferable for new companies and small businesses that require limited liability and want to fill as little paperwork as possible so as to devote most of their energy on running the business.
Flexibility Seekers: The owners that are looking for a less rigid structure to manage their company will enjoy this structure as they can be structured in many ways when it comes to management and distribution of the profits.
S Corp. (S corporation)
What is a S Corp?
An S Corp is a modified corporation that allows its owners to bypass corporate taxation and has certain restrictions. This type of taxation system is very advantageous because most small business owners who want to own a corporation do not want to deal with taxes that are complex.
Benefits
Tax Advantages: Earnings and losses can funnel through the individual income of the owners, escaping the corporate tax levels, and thus reduce the overall taxes payable by the owners.
Limited Liability: The owners’ involvement in the company is similar to an LLC, in a way that their personal assets will not be at risk as their business debts are concerned.
Investment Opportunities: It becomes simpler to raise money through the sale of stock making it great for those investors who would want to buy into your business.
Who Should Choose an S Corp?
Small to Medium Businesses: It can be adopted by businesses that intend to have not more than 100 shareholders making it ideal for small companies or family businesses that seek for expansion.
US-Based Owners: All shareholders must be either citizens or residents of the US, which might be a restriction for some businesses that would like to raise funds from outside the country.
C Corp (C Corporation)
What is a C Corp?
A C Corporation is a corporation in which the owners or shareholders have a separate tax liability derived from the corporation. This structure is most opted for by large corporations that seek to plow back the earnings made from the business.
Benefits
Unlimited Shareholders: Lots of C Corps raise investment funds by creating several classes of stock in the company; it also allows C Corps to seek a lot of money through IPOs.
Perpetual Identity: The operations of the business do not change with the sale of assets, allowing assurance and security to investors and other stakeholders.
Tax Reduction: Such businesses, in this case, C Corps, are entitled to the tax deductibility of employee benefits, health insurance for instance, which makes the company competitive in hiring and keeping the best employees.
Who should consider a C Corporation?
Larger Businesses: Welcome for companies seeking massive growth and likelihood of going public because they are able to carry on large scale employer’s enterprises with elaborate business operations.
High Growth Startups: This structure is favored by businesses that aim to raise funds from venture capital or other specific investors because of its propensity for higher returns.
Sole Proprietorship
What is a Sole Proprietorship?
A Sole Proprietorship is a one-person owned simple structure of a business which one has full control over. Such models are common with self-employed persons and small companies because of its low setup cost.
Benefits
Decision-making Exclusiveness: On the other hand, the owner avails himself/herself the unfettered discretion to make decisions and steer the business including at times change drastic reforms.
Simplicity: The business owner will be able to form and run the business with very little administrative and bureaucratic formalities and therefore ideal for beginner businesspeople.
Tax Benefits: This property Structure will report all of its income and expenses in the owner’s personal Income Tax return which will ease the tax responsibility and the tax rate may reduce.
Who should consider a Sole Proprietorship?
Freelancers and Small Businesses: Best for people ready to practice businesses on a very low risk & less notice period so as to allow them implement their concepts without making large financial commitments.
Partnership
How would you define a Partnership?
A Partnership is formed when two or more people come together to have a common objective and when there is a profit, it is shared among them and so are the debts. Such a structure leverages on the benefits of more than one person creating a conducive environment.
Benefits
Divide and Conquer: Partners share the duties and assets of the undertaking and as such management is greatly simplified and a variety of qualifications can be brought to bear on making the project a success.
Formation: A Partnership would comprehend a group of people working together but it may be created with little relevance to law hence introducing a problem in ascertaining the legal representative.
Pass through of tax: The income or loss simply goes through to the partners’ tax forms meaning that there is no double taxation on the partners which is a plus to all of them.
Whom does this structure of partnership suite?
Collaborative Projects: Very common with professions or businesses such as law firms, consultancies etc. and creative agencies that require the expertise of other professionals hence enhance the enjoyment of doing business.
Conclusion
The choice of how to arrange your business depends on what you are doing and what you have in your approach towards the future. Whether your focus is on operational flexibility, advantages regarding taxation, or pulling in higher funds, the understanding of LLCs, S Corps, C Corps, Sole Proprietorships, and Partnerships, which of these has advantages, will make you make the right decision for the welfare of your business.
Wish to get more tailored counsel? Then reach out to our experts today (Easyfiling) and go over the possibilities in further detail to guarantee that you choose the structure that consistently holds the ideals and accepts your business objectives.