Business Organization Types
You may have heard people talk about “Sub-S” corporations, LLCs and PCs and their relative merits. You will need to decide which form of business is right for you based on criteria such as:
- Ease and cost of formation
- Administration and record keeping
- Liability, and more.
Here is a brief description of each form:
A sole proprietorship is a business run by an individual. The owner is the business; the owner has all of the profits and losses of the business. The owner also has all the control and all the liability from the business operations. Business taxes are paid by the owner through his or her personal income tax return.
Read more about thesole proprietorship, including advantages and disadvantages and taxes.
A partnership is a business which operates like a sole proprietorship, but with several individuals running it. The partners share the profits/losses, have control and liability for business operations. Partnership taxes are paid by the partners on their personal tax returns, in proportion to their share of ownership.
Corporation (or C-Corporation)
A corporation is a business which is set up as a separate legal entity from its owners. The Board of Directors makes operational decisions. Owners are protected (shielded) from liabilities of the corporation, and the corporation pays corporate income taxes.
S-Corporation (or Subchapter-S Corporation)
A small business corporation may elect to be classified as an S-Corporation, to have the liability protection of corporate status, but taxed at individual rates. Here is a more detailed comparison between a C-Corp and an S-Corp .
Limited Liability Company (LLC)
A limited liability company is formed by "members" whose liability is limited to their investment. An LLC is often used in place of partnerships to limit liability, while having the option of being taxed through the personal tax returns of the members. Here is more information on LLCs vs. Corporations.
The Business Type Checklist
Understanding the different business types is interesting, but it doesn't help you decide which type to select. Here are some factors to consider:
- Are you just starting your business? If so, you may want to select a simple type like a sole proprietorship. You can always change later.
- Are you working alone, with no employees? In this case, a sole proprietorship or single-member LLC might be the best option for you.
- Do you sell products which could be misused or subject you to liability? You probably want a corporate structure to shield your personal assets from the liabilities of the corporation.
- Are you working with other professionals in a group? A partnership or a multiple-member LLC might give you protection against liabilities and allow all members of the group to have a say in the day-to-day running of the business.
- Do you have silent partners or investors who don't participate in running the business? A limited partnership or a corporation allows shareholders or limited partners.
- Do you already have a corporation but you want lower taxes and simpler operations? You may be able to elect an S corporation status.