Choosing The Right Business Entity}

Choosing the Right Business Entity

by

Elizabeth Bambara

Probably one of the most confusing yet important decisions you will need to make when starting up your business, is choosing the right business entity. There are various types of business entities to choose from. Each one has different legal and tax implications for owners and managers.

You’ll need to analyze the consequences of utilizing different types of business entities along with the purpose and goals of the business entity. Choosing the right entity will depend on three primary factors: liability, taxation and record-keeping.

Types of Business Entities

Sole proprietors, partnerships, “C” corporations, “S” corporations and limited liability companies or LLC’s are the most common forms.

The Limits

We will be focusing on LLC’s(Limited Liability Corporations) here since LLC’s have become the most popular form of business entities for new companies. Many existing entities have changed over to this form as well. Partially due to the edge they have on general and limited partnerships from a business standpoint.

Pros

LLC’s are extremely flexible, more suitable for a very wide range of businesses. Ideal for small businesses with a limited number of partners. It’s somewhat of a hybrid between a corporation, which has shareholders, and partnerships, in which the partners own the company but don’t have shares.

Offers many of the same advantages of a corporation, sole proprietors, and partnerships. The biggest advantage is that unlike sole proprietors or partnerships, the members, who are the owners, are legally separate from the entity. Unless someone makes a specific personal guarantee, the amount at risk for members is limited to their investment.

Without risking their limited liability status, members can be active in the management of the corporation and utilize the same management structure of a partnership.

With two or more members, the LLC has the flexibity in allocating profits and losses. Passing the profits directly to the partners without the double taxation of a “C” or “S” corporations. With the additional option to be taxed as a C corp if it is beneficial. Plus, they are not limited by the same restrictions which S corporations are.

When it comes to taxes, sole proprietors, partnerships and LLCs come out about even (they’re all pass-through entities). Unlike the double taxation of a “C” corporation.

Cons

Unlike a C corporation, no losses can be carried forward into future tax years and an LLC cannot keep retained earnings, meaning that it must distribute the profits or losses to its members every tax year. One potentially major drawback is that the legal treatment of a Limited Liability Corporation varies by state. So, for business that plan to operate in multiple states, this entity might not be viable.

Your Future

Choosing the form of businesses entity you want is an important decision you will make that will effect your business’ future. When you have the facts, this decision will not be as difficult as you might think when you addresses the pros and cons of the different types of business entities that exist.

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