Whenever a person starts to think to open a business entity in the United States, one and the foremost question arises in the mind that which type of business entities is useful for them. Hence to overcome this type of situation there is a brief explanation done below to understand well in brief about different types of Business Structure that one thinks about.
1. Sole Proprietorship
It is the simplest structure that involves only one individual who owns and operates the enterprise. This Person is responsible for the business, including all liability and any profit or loss. If you want to work alone, then this type of structure will help a lot.
Pros of Sole Proprietorship
- Good choice for low-risk businesses
- It is easy to start
- Tax filing is easy—simply fill out and attach Schedule C-Profit or Loss from Business to your personal income tax return.
- No formalities to be observed except basic bookkeeping
Cons of Sole Proprietorship
- It does not Produce a separate business entity.
- Your business assets and liabilities are not separate from your personal assets and liabilities.
- Personally liable for the debts and obligations of the business.
- Banks are hesitant to lend to sole proprietorships.
2. General Partnership
If your business is controlled and operated by a variety of individuals, then the term is used as a General Partnership. In this partnership, the partners own the company and assume responsibility for the partnership debts and many other obligations.
Pros of General Partnership
- Profits taxed only once
- Partners may have complementary & multiple skills that would helpful for the businesses
- Easy to establish (with the exception of developing a partnership agreement)
Cons of General Partnership
- Partners are jointly and individually liable for the actions of the other partners
- Business can suffer if the detailed partnership agreement is not in place
- Disputes among partners can unravel the business (though drafting a solid partnership agreement can help you avoid this).
3. Limited Partnership
A Limited Partnership is a registered business entity as compared to a General Partnership. To form such type of Partnership one has to file the proper paperwork. In a Limited Partnership, there are two kinds of partners: those who own, operate, and assume liability for the business (general partners), and those who act only as investors (limited partners, sometimes called “silent partners”).
Pros of Limited Partnership
- Limited Partner Faces Limited Liability for Losses
- The responsibility of Work are duly delegated
- Capital Amount in Partnership business is Quite Generous
Cons of Limited Partnership
- General Partners Bear Maximum Risk in Case of Debts
- Limited Partners Do Not involve in Decision-making
- Chance of Dispute among Partners is high
A C-corporation is a corporation that is taxed separately from its owners. It gives the owners limited liability encouraging more risk-taking and potential investment.
Pros of C-Corp
- Have the option of splitting profits and losses between the business and the owners to create an overall lower tax rate. Check with your accountant on the best way to do this for your situation.
- C corporation is legally an entirely separate entity from the owners and shareholders, owners and shareholders cannot be held responsible for any debts of the C corporation or any lawsuits brought against it.
- C corporation can sell stock or shares, either common or preferred — and there’s no limit to the number of shareholders
Cons of C-Corp
- C-corporations face double taxation: The company pays taxes on the corporate tax return, and then shareholders pay taxes on dividends on their personal tax returns.
- Owners cannot deduct business losses on their personal tax returns.
- Increased regulations and paperwork
S-corporations do not pay income taxes rather the earnings and profits are treated as distributions. The shareholders must report their income on their individual income tax returns.
Pros of S-Corp
- Limited liability for management and shareholders.
- Flow-through taxation: Profits are distributed to the shareholders, who are taxed on profits at their personal level.
- Good privacy protection, especially in Nevada and Wyoming.
Cons of S-Corp
- Maximum of 100 shareholders, all of whom must be U.S. residents or resident aliens. Shares must be held directly, except in special circumstances.
- Because flow-through taxes will be paid at the personal rate, high-income shareholders will pay more taxes on their distributions.
- There are more limits on issuing stock with S-corps vs. C-corps
A limited liability company or LLC is a hybrid business structure that provides the limited legal liability of a corporation and the operational flexibility of a partnership or sole proprietorship. However, the formation is more complex and formal than that of a general partnership.
Pros of LLC
- The biggest advantage of a limited liability company is right in the name — it limits your potential liability as a business owner.
- It is incredibly easy to set up and administer LLCs.
- LLCs can get started with any number of members.
Cons of LLC
- Compared to sole Proprietorship or Partnership, an LLC is more expensive to operate.
- Additional Tax forms aside from the new potential tax liability of starting an LLC, the process of preparing taxes becomes more complicated.
- The owners of a limited liability company must be careful to keep their personal business separate from the business of the limited liability company.
How to Choose the Right One
Depending on the situations you can choose the Business Structure that fits you. Each one has its pros and cons so be careful by choosing from the above option. My general advice is that if you are the small one that starts with the Sole Proprietorship and later on you can move for General Partnership, LLC and C-Corp.