The right business entity can protect both you and your business. When you start or form one, you need to decide on how it will be structured—and this brings us to choosing the correct business entity.
Why are we putting such a large emphasis on this? This will determine how your business functions, how it will make major decisions, and how it will be taxed.
What Is An Entity?
An entity is an organization that you (or you and your partners) create to run your business. Here are some of the ways you can structure your business:
- Sole Proprietorship
- Limited Liability Company (LLC)
- Partnership
- C Corporations
- S Corporations
Sole Proprietorship
You don’t even have to file anything if this is how you choose to run your business. You will be personally responsible for debts and any potential lawsuits filed against your business. You will pay taxes as part of annual income taxes. This is almost always a bad idea, legally, but happens often because it is the default option.
LLC
This is where you start to see the separation between you and your business. Your personal assets are not tied to your business’s assets. If your business fails, your creditors cannot take your personal assets.
If you have multiple partners, your business will be run based on an operating agreement that you create.
In regards to taxes, they will likely be “pass-through.” This is a term that means the money you make or lose “passes through” corporate taxation and gets accounted for on your personal income taxes.
Partnership
This is similar to a sole proprietorship, but it is with multiple people. You will not need to file anything to form a legal partnership. And the partners will be personally liable for debts and lawsuits of the partnership (again, something you will want to avoid). Taxes get paid through personal income taxes as well. Two common types of partnerships:
- Limited Partnerships – 1 partner who has unlimited liability (everyone else has limited liability)
- Limited Liability Partnerships – Limited liability to all partners
With the limited partnerships, the partner who has unlimited liability has more control over the company than the patterns with limited liability.
C Corporations & S Corporations
Like the LLC, these two entities are going to create an independent entity that is separate from you and your personal assets. When compared to your other options, operating as a corporation or LLC is going to offer you the most amount of protection in terms of your personal liability.
Corporations tend to be less flexible than LLCs and can be more costly to maintain. Corporations can have more rigid rules concerning your records, by-laws, shareholder meetings, and reporting. C Corporations are taxed once when they make profits, and then a second time when shareholders are taxed on what they receive as well (their distributions and/or dividends).
And an S Corporation, unlike a C Corporation, does not pay corporate taxes. Profits and losses “pass-through” to personal income taxes. S Corporations have very strict rules that limit the number and types of shareholders the corporation can have. S Corporations also have limits on the amount of passive income (such as rental income) the corporation can receive, so they are generally not good choices for real estate investment businesses.
Neve Webb
Choosing how you will form your business will be one of your first major decisions. At Neve Webb, we are in a unique position to not only explain your options but can advise you about how they will impact you and your business specifically. We also work with your accountant on the tax implications of the entity you choose or refer you to an accountant that can properly advise you on tax issues. Contact us through our website to schedule your consultation.
Quantum Lex
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