Different business structures boast various advantages and disadvantages. Refer to the comprehensive list below.
An C corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. When you form a corporation, you create a separate tax-paying entity. Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders. Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.
Advantages: Limited Liability, Ability to generate capital, Corporate Tax Treatment, Attractive to potential employees.
Disadvantages: Time and Money, Double Taxing, Additional Paperwork
An S Corporation is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. To be considered an S corporation, you must first charter a business as a corporation in the state where it is headquartered. According to the IRS, S corporations are considered by law to be a unique entity, separate and apart from those who own it. This limits the financial liability for which you are responsible. S corps do not necessarily shield you from all litigation such as an employee’s tort actions as a result of a workplace incident. What makes the S corp different from a traditional corporation is that profits and losses can pass through to the your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself reasonable compensation. Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as wages.
Advantages: Tax exemption, Business expense tax credits, Independent life
Disadvantages: Stricter operational processes, Shareholder compensation requirements
A non-profit Corporation is formed in order to conduct activities and transactions for purposes other than shareholder financial gain, while at the same time providing the same asset protections and limited liabilities of a standard corporation. A nonprofit corporation can make a profit, but this profit must be used strictly to forward the goals rather than to provide earned income, in the form of dividends, to its shareholders. It is understood that most of the transactions and activities of a Nonprofit Corporation will not be commercial in nature.
Advantages: No taxes, Protection from personal liability
Disadvantages: Limited Funding, Social Pressure, Paperwork
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. Because you and your business are one and the same, the business itself is not taxed separately-the sole proprietorship income is your income.
Advantages: Easy and inexpensive to form, Complete control, Easy tax preparation
Disadvantages: Unlimited personal liability, Hard to raise money
Limited Liability Company (LLC)
A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
Advantages: Limited Liability, Less Recordkeeping, Sharing of Profits
Disadvantages: Limited Life, Self-Employment Taxes
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is governed by existing partnership law except to the extent that the law has been modified for the LLP. Partners in an LLP are still designated and treated as partners. Likewise, the LLP is taxed in the same manner as a partnership. The LLPs attractiveness is the limited liability of the partners. A key goal of an LLP is to limit the liability of the partners for the actions of every other partner in the partnership. However, this liability protection does not usually cover the general obligations of the partnership such as normal commercial obligations. In addition, the LLP structure does not limit a partner’s liability for one’s own misconduct.
Advantages: Less risk for general partners, Partners are not taxed on profits, Partners are not personally liable for company debts, Management of an LLP is far more flexible than other structures, Autocracies are avoided
Disadvantages: Partners do not have personal liability for the actions of the business, Extensive legal documentation required, Termination of partnership due to withdrawal of one or more partners, Limited to certain professions
Limited Partnership (LP)
A limited partnership is a partnership with one or more general partners which are personally liable for partnership debts, and one or more limited partners which contribute capital and share in the profits of the business. The limited partners are not liable for the debts of the business, but cannot actively participate in the management of the business. For most purposes, limited partnerships are not as flexible or useful as Limited Liability Companies(LLCs) or Limited Liability Partnerships(LLPs).
Advantages: No turnover issues, Less Paperwork, Asset Protection
Disadvantages: Compliance challenges, Divided authority among partners, More legal documentation
Limited Liability Limited Partnership (LLLP)
A limited liability limited partnership (LLLP) is a new modification of the limited partnership (LP). The big benefit of this entity is that it protects the partners from liability when the partnership is exposed to a lawsuit. It also provides asset protection. That is, when the partners are sued personally, the assets inside the partnership are protected from being taken by the judgment creditor of a partner. This type of partnership also provides limited liability for the general partners of the limited liability partnership. This is unlike a limited partnership, where the general partners are jointly liable for all obligations of the partnership. Limited Partnership law and the limited partnership agreement remains in effect. The longstanding asset protection case law history provided for by limited partnerships are used to provide support the asset protections inherent in the law for this entity.
Advantages: Reduces potential liability of the general partner, Asset protection
Disadvantages: Untested liability protection