Business Structures: Which One Is Right for My Enterprise?
Once you've decided to go into business, you must decide which of the many business structures available will be right for your enterprise.
How do you choose? That will depend upon your personal circumstances, and those of your partner(s), if you have them.
A good way to begin deliberations on which form to choose is to ask and answer some basic questions about your own situation, and the purpose or goals or your budding business:
Do you plan for your business to borrow money?
Do you plan for your business to reinvest its profits in the near term?
Do you plan for your business to sell investors ownership interests sometime in the future?
Will you own the business by yourself, or will there be more than one owner?
Do you plan to have your business offer a professional service?
Are you going to need or want protection from personal liability?
If there will be more than one owner, will you want or need to split profits unconventionally?
Are you planning to have the business offer fringe benefits to your employees?
The way you respond to the above questions will largely determine which of the common forms of legal business entity will best fit your operation needs.
This is the most common and easy business entity to form. It offers you as the owner total managerial control; but, it also leaves you personally liable for all of the business' financial obligations. This simple structure may be the right choice if you intend to work alone.
This is a form that may be appropriate when you are working with two or more people with whom you agree to share the profits and the losses of the enterprise. Whether the partnership makes money or loses it, the profit or loss is passed through to the partners, who list these on their individual income tax returns. No taxes are levied on the partnership entity. The biggest disadvantage of the partnership form is that each partner bears personal liability for the financial obligations of the company. There are two types of partnerships – general partnerships, and limited partnerships. With a general partnership, the partners manage the business and they also have to take responsibility for its obligations and debts. A limited partnership also has general partners, but in addition, it has limited partners who serve solely as investors. The limited partners exercise no control over the business and aren't subject to the same liabilities that general partners must shoulder
These are legal entities that are created to conduct business. The "C" corporation is considered the "standard" business corporation. It is called a "C" corporation because it is covered by the requirements of Chapter C of the Internal Revenue Service code. In comparison to LLCs, S corporations and other business entities, the C corporation must comply with the greatest number of reporting formalities. There are numerous benefits that accrue to those who choose the C corp as their business entity. These include: Limited personal liability for business debts; fringe benefits that are deductible as business expenses; no dissolution in case of change in ownership or death of the owner; and, there are numerous stock advantages, such as no limit on how many people can become stockholders.
An "S" corporation is a company that forms as a C corporation and then chooses special tax status that makes it a "pass-through" entity, like an LLC. An S corporations' profits and losses can be passed directly to the owners without first being taxed at the corporate level, because, unlike a C corp, an S corp is not a separate taxable entity. Thus, choosing S status eliminates the double taxation issue faced by owners and shareholders of C corps.
Professional Corporations (PCs).
Generally, PCs are required to be organized for a sole purpose, such as rendering legal services, or medical services. This is the form that might be best for you if you intend your business to provide professional services. Typically those professional services are regulated by each state's specific board or organization charged with monitoring given professions, such as the State Bar for lawyers, or the State Medical Board for physicians. Laws differ by state when it comes to PCs - another good reason to make sure you incorporate with the help of professionals.
A non-profit corporation is an entity that provides many of the benefits of regular ( C ) corporations, but is created for reasons other than generating a profit from its activities. This does not mean a non-profit is prohibited from generating more income than it expends: Its tax-free profits can go to pay reasonable salaries or to further the cause espoused by the organization. The most common form of non-profit is known as a 501 (c) (3) (exempt from federal corporate income tax under the Federal Internal Revenue Code section 501 ( C ) (3), and must be formed for charitable, educational, religious, literary or scientific purposes for the benefit of the public.
Limited Liability Companies (LLCs).
These are really a hybrid form of a partnership, because they let owners have the benefits both of the corporate and partnership business structures. LLCs allow both profits and losses to pass through to the owners, with no tax upon the business entity. Owners of an LLC also are protected from personal liability. If this form is right for you, you get the best of both worlds, protection from personal liability like a corporation, pass-through of profits and losses like a partnership, and no double taxation. In addition, there is no limit on the number of shareholders. And there are other benefits.
Caveat: Seek Expert Advice.
No matter which of the many business structures you choose, do not enter into your decision uninformed. It is crucial that you seek out and follow expert advice from someone who can help you parse out the pros and cons of each option.