Picking the right business structure is a critical since your choice can impact how you pay your taxes, how much paperwork you need to file, and how you can distribute your profits. Below is a list of the types of business structures along with how advantageous and disadvantageous they are. One form is not necessarily better than any other. Each business owner must assess his or her own needs. It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.
Sole Proprietorship
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. In general, the owner is also personally liable for all financial obligations and debts of the business. Sole proprietors can operate any kind of business so long as it’s a true business.
Advantages of a Sole Proprietorship
- Easy and inexpensive to form
- Complete control
- Simplified tax preparation
Disadvantages of a Sole Proprietorship
- Unlimited personal liability
- Hard to raise money
- Heavy burden
Partnership
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership does not pay any income tax at the partnership level.
Advantages of a Partnership
- Easy and inexpensive
- Shared financial commitment
- Complementary skills
- Partnership incentives for employees
Disadvantages of a Partnership
- Joint and individual liability
- Could be disagreements amongst partners
- Shared profits
Corporation
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level.
Advantages of a Corporation
- Limited liability
- Ability to generate capital
- Corporate tax treatment
- Attractive to potential employees because of competitive benefits
Disadvantages of a Corporation
- Time and money to start and operate
- Potential double taxation
- Additional paperwork due to regulations
Subchapter S Corporation
The Subchapter S Corporation is a variation of the standard corporation. The S Corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. An S Corporation has the same corporate structure as a standard corporation.
Advantages of an S Corporation
- Tax savings
- Business expense tax credits
- Independent life
Disadvantages of an S Corporation
- Stricter operational processes
- Shareholder compensation requirements
Limited Liability Company
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members.
Advantages of an LLC
- Limited liability for members
- Less recordkeeping compared to an S Corporation
- Fewer restrictions on sharing of profits amongst members
Disadvantages of an LLC
- Potential limited life upon a member leaving
- Self-employment taxes