Choosing the correct entity for your business is a crucial decision that will significantly impact your company’s success. Your selected entity will determine your legal structure, tax obligations and personal liability.
The most common entities are sole proprietorships, partnerships, limited liability companies (LLCs), S corporations and C corporations. The right choice depends on various factors, such as the size of your business, the number of owners, the industry and your future growth plans.
Sole proprietorships
Sole proprietorships and partnerships are simple entities that do not require legal documentation. They offer complete control to the owner or owners. However, they also expose the owner to personal liability and provide limited opportunities for raising capital or attracting investors.
Limited liability companies
LLCs are the most common choice for small businesses. They offer the flexibility of a sole proprietorship with the liability advantages of a corporation. According to the IRS, single-member LLCs qualify as disregarded entities, making pass-through taxation a valid option. Disregarded entities still maintain liability protection.
S corporations
S corporations are like LLCs in tax treatment. The difference is they have more ownership restrictions and allow up to 100 shareholders. They are a popular choice for small to mid-sized businesses.
C corporations
C corporations are separate legal entities that offer limited liability protection to shareholders and have no restrictions on ownership. They also have the most complex tax structure.
Choosing the correct entity for your business is crucial in establishing a solid foundation for your company’s success. You can select the entity that best suits your business needs and goals by carefully considering every option.