What Entity should I be?

What Entity Should I be?

How should I structure my business: sole proprietor, corporation, etc?

Most new businesses should probably organize as sole proprietorships because of the simplicity and low initial cost. Review your business plan with a SCORE business counselor to discuss various business structures and determine which best suits your business. If more than one individual will own the business, a business attorney and accountant should be consulted from the beginning, so necessary legal documents can be prepared and filed for your partnership or corporation.

Sole Proprietorship

A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return. Many businesses operate as sole proprietorships. This is the simplest form of organization with the greatest freedom from regulation and     paperwork. Advantages include: It is easy to form, You are in full charge regarding all decision-makings, Offers the most flexibility, Simpler taxes, Less bureaucratic restrictions.

Disadvantages include: Owner has unlimited personal liability for debts of the business, Difficult to raise capital and financing, Depends on the singular ability of the owner, Less professional in appearance, The business terminates with or upon the death of the owner

Partnership

An association of two or more persons to carry on a business. Co-ownership of assets. The need for a Written Articles of Partnership. Mutual agency: share of management and profits. Advantages include: Easy to form, Direct rewards, Combined efforts, Easier to attract capital, Flexible. Disadvantages include: Unlimited liability of at least one of the partners, Dependent on the other partner, Dependent on the judgment of the partners as an agent, Difficult to dissolve, Death of a partner terminates the business, Any one of the partners can commit the firm to obligations.

Corporation

A distinct legal entity existing on its own Advantages include: Liability is limited to the amount the owners have paid for their shares of stock together with undistributed profits, Continuity is unaffected by the death or transfer of shares by any of the owners. Better image, suggests more professionalism. Disadvantages include: Extensive record keeping; Activities limited by the charter. Extensive government regulations, .Double taxation. More complicated to form, could require legal assistance. However, some of the disadvantages are eliminated under a “Chapter S” election which the IRS recognizes for the benefit of certain small corporations.

"S" Corporation

The S Corporation is a corporation, for which an election has been made with the Internal Revenue Service for the income to pass through and be taxed directly to the stockholders on a pro-rata basis, avoiding double taxation on profits and dividends. It allows the stockholders to offset business losses against their personal income according to certain IRS regulations. The S Corporation must have seventy-five or fewer shareholders. The corporation can have only one class of stock. All shareholders must consent to the election. Can not have alien, non-resident shareholders. The corporation cannot own more than 80% of another corporation. At least 75% of the receipts must be generated by business.

Limited Liability Company

Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP) are relatively new business forms. They combine some of the advantages of a Chapter S corporation with those of a partnership. They have the limited liability advantages of a corporation, but operate with the flexibility and tax obligations of a partnership, a corporation or a sole proprietorship. An LLC is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), a partnership or a corporation.

For any form of organization beyond a sole proprietorship, it is best to consult with legal counsel.