It is estimated that more than 543,000 new businesses are started each month. With so many small business owners out there, it’s no wonder why the small business owner is such an important part of the modern economy.
If you have plans to join this group of small business owners and entrepreneurs, there are many decisions you have to make. One of the first is what type of business entity is right for you? Should you set up an S corporation, what’s the difference between all the different types? When it comes to LLC vs. Inc, what’s right for you?
These are big questions and important decisions. Use the information here to figure out what option you should choose for your business.
Sole Proprietorship or Partnership
A sole proprietorship is when you own the business – with no one else. If there are other people who also own the business, then you have a partnership. If you opt to do business this way, you may want to file a DBA, which means “Doing Business As.” This allows you to do business under another name, then your legal one.
The primary advantage of a partnership or sole proprietorship is that it isn’t as costly, and it is much easier to run than an LLC or a corporation.
Limited Liability Company – LLC
If you opt to create an LLC with your business, then you have more flexibility than a corporation regarding how it will be managed and how the financial interests are going to be split. From a tax standpoint, LLC and S corporations are extremely similar because it’s considered a pass-through entity.
Even though LLCs and S corporations are similar when it comes to federal income tax, they are not taxed exactly the same. For example, when it comes to employment taxes they are affected differently. If you are thinking about forming an LLC, be sure to consult with a tax professional to ensure it is the right option for you.
S or C Corporation
Corporations are separate legal entities that are formed according to the state law. The corporation actually owns the business, as well as all of its properties and assets. It’s the shareholders who actually own the corporation.
The primary advantage offered by incorporating is that the shareholders aren’t liable for the debts of the business – the corporation is. There are several situations when a corporation is the right option for you. Some of these include:
- The flexibility to provide medical and health benefits
- To easily sell the business
- To provide flexible profit-sharing among the owners
- As venture capital for financing
- To offer stock options to your employees
- To have an accountable plan for entertainment and travel
There are two options when incorporating. A C corporation is taxed under the Subchapter C of the IRS code. With an S corporation, you file a form with the IRS and the losses, profits and other taxable items go through the corporation to you, so you can report on your personal tax return.
Each of the options listed here has both advantages and drawbacks. One of the best ways for you to determine which business entity is the right one for you, is by working with the professionals. They can evaluate your wants and needs for the business and determine which option suits these things. In the long run, this will help you have the best chance possible for success. Remember, knowledge is power. If you want the best chance possible for your business to succeed, you need to ensure you choose the right organization option.
