When considering starting a business there are multiple factors to consider. Whether you are a solopreneur, entering business with a partner, or operating as a gig contractor looking to incorporate, the decision is not one to take lightly.
One of the major decisions to evaluate is the structure of your business entity. Listed below are the most common forms to choose from:
- Sole Proprietorship
- Limited Liability Company (LLC)
- Corporation (S or C corporation)
- Non-profit Corporation
Each entity has pros and cons, but ultimately you will need to consult with an attorney or accountant to evaluate your specific situation. We will provide a brief explanation of each entity to help you better understand them.
It’s helpful to start with an example of how each entity may be used in operating.
Sole proprietorship: A gig worker such as a driver for a rideshare platform who works for herself and files taxes under her own name. It’s recommended to use a Doing Business As (DBA) in this scenario as well.
Partnership: Two dentists who own a dentist practice together and share profits and decision-making responsibilities. This could be set up us a limited partnership (LP) or limited liability partnership (LLP). The ownership percentage can be split anyway the partners agree on. A partnership agreement reviewed by an attorney is highly recommended.
Limited Liability Company: Often used to protect a business owner’s personal assets and limit his liability from any lawsuits filed against the business. This also allows the business owner to register the business name with the Secretary of State in which they form the LLC.
Corporation: Allows multiple shareholders to own shares of stock in a company. Provides liability protection for shareholders and distribution of profits through dividends or distributions.
The C-Corporation structure is generally used by fortune 500 corporations or founders seeking to raise capital. This structure is commonly known as being subject to double taxation (corporate tax and individual tax). While true, this primarily applies in this scenario: 1) the company is profitable and 2) the company pays dividends to the shareholders. In most early stages of the company, there isn’t a profit or at least not enough to pay dividends so double taxation isn’t a factor.
The S-Corporation structure may be used for a single owner, family-owned business, or a business with limited shareholders. This structure provides tax savings for a self-employed individual whose business is growing as the owner can be an employee of the company. This allows the owner to receive a W2 and other benefits including a distribution of profits. This entity is a pass-through entity meaning there is no tax paid by the company. Any profits are taxed to the shareholders when filing their personal tax return.
Non-Profit Corporation: is used to operate for charitable, educational, religious, scientific, or literary purposes. These organizations submit documentation to be tax-exempt as a 501(c)(3). This tax-exemption is from federal income taxes, state agencies will have separate regulations.
A not-for-profit, while similar, differs in that it also includes community organizations, trade associations, social clubs, and some professional organizations. A not-for-profit in this category may or may not be tax-exempt.
The major advantage to non-profit organizations other than being tax-exempt is the ability to receive grants and donations. When considering this structure, determine the cause and purpose of the organization and if grants and donations will be a large part of funding the operations.
We will continue to dive deeper into entrepreneurship, business growth, and tax planning in future articles. Stay tuned for the launch of our YouTube channel where will provide vital information to help you grow your business and wealth.