To create the right business, you need to start off with the right entity. There are a variety of business entities available to utilize. For the purposes of this article, we will focus on Limited Liability Companies, C Corporations, S Corporations, Partnerships, and Sole proprietorships.
A sole proprietorship is the simplest of the entities. If you are looking to create your own business, this is the business structure for you. Unlike the others, creating a sole proprietorship does not require any state filings. Moreover, you have the ability to create your own hours and the operation of the business is controlled solely by you. In terms of revenue and taxes, you must report profits and losses on your own personal tax return.
However there is a downside to sole proprietorships that you should be aware of. If someone sues you, your business will not protect you. To the contrary, you are personally liable. For example: you decide to open up your own cleaning service. You are mopping the floors of one of your customers. If the owner of the house slips, ue to the wet floors you created, he or she may attempt to sue you. Skipping past whether you are liable or not, if the case is decided in their favor, you are personally liable. Stated more directly, they can come after you and your assets. Therefore, keep this in mind if you decide to go this route.
A partnership is just as it sounds, two or more people coming together to form a business. The foundation of a partnership is similar to a sole proprietorship. They are easy to form and operate, all partners in the partnership are personally liable, and profits and losses are reported on each partner’s personal tax return.
One aspect of a partnership that we feel is necessary to highlight for you is joint and several liability. This means that all partners are jointly liable for any lawsuit filed against them. However, the partners also have full liability themselves. This means that if a lawsuit is filed, the damaged party could seek recovery from any of the partners individually. Despite that, you may still then subsequently seek recovery from your other partners.
Limited Liability Company
Unlike a sole proprietorship and partnership, a Limited Liability Company does not create personal liability on your behalf. Alternatively, you are only liable for your investment. If liability is your main concern, corporations and limited liability partnerships also afford business owners the same protections as a Limited Liability Company.
The Limited Liability Company (or LLC) offers maximum flexibility with low costs of operation. For gig workers, self-funded small businesses, investment vehicles and other such arrangements, the LLC is an ideal entity type. This is a separate legal entity from the owners, unlike a sole proprietorship and partnership. In other words, you can avoid personal liability and only have your business assets subject to liability. In addition, you are only taxed once on your personal tax return. Finally, form an LLC with as many others as you want; there are no limits to the amount of owners.
The one downside to an LLC is that some outside investors do not like them due to the pass through nature of their tax treatment. If you plan to raise venture capital or other outside funds, you should probably consider a Corporation instead.
For the purposes of this article, we want to draw your attention to S corporations and C Corporations. For a full list of similarities and differences between the two, please take a look at this post. However, for the purposes of this article we feel it is vital to address their taxation differences. Above you read how partnerships and sole proprietorships are taxed once on the partners/sole owners personal tax return. S Corporations are taxed the same way; only one time. However, C Corporations are taxed twice. C Corporations are taxed once on the corporate tax return and again on the personal tax return. Therefore, if you are a small business, we recommend avoiding C Corporations to avoid hefty, double-taxation.
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We hope this helps you decide which business formation to pursue. Here at JustLaw, we have a large group of attorneys skilled in business matters, and we pride ourselves on speedy results, fair prices and straight talk. So do not be afraid to reach out for help!