When contemplating starting a business, the chosen entity can be one of the most crucial decisions the entrepreneur finds themselves facing.
Whether they choose a sole proprietorship, partnership, limited liability company or a corporation, each business structure type poses both advantages and disadvantages in comparison to the other forms.
The primary benefit of a sole proprietorship is the overall control of the business that the owner is able to exert. However, since the business and the sole proprietor are one and the same from a legal standpoint, a business owner may be held personally responsible for anything that goes wrong with the business.
Functionally, partnerships operate like a sole proprietorship with multiple owners. There is some favorable tax treatment to establishing a partnership, however, there are also managerial drawbacks of having multiple owners with equal control.
Limited liability company
LLCs arguably provide the most protection with the least downsides. LLCs are fairly inexpensive to create and maintain, and reduce personal liability for members and managers. LLCs also allow for pass-through taxation, meaning that the LLCs will not be subjected to federal corporate income tax.
Instead, its profits and losses will pass through an individual member’s tax returns. However, LLCs do cost more than sole proprietorships and partnerships, and members may be subjected to a self-employment tax.
A corporation protects shareholders from liability beyond the dollar amount of their investments and is allowed to raise funds by selling shares. However, the corporation may be subjected to double taxation and can be more complicated to form.
This is just a general overview of some of the pros and cons of each of the main types of business structure. Before choosing a business structure for your business, consider consulting with an experienced business and commercial law attorney for a more in-depth look at each option.