Incorporating Your Business: Comparing The Main Business Types
Comparing LLC vs. S-Corp and other business structures
Curious about Sole Proprietorship and C-Corp?
Let’s start at the beginning: Do you need to incorporate your business or not?
If you are a home based business and doing something fairly simple it won’t get you in any legal trouble and you want to keep your tax situation and life is simple as possible then a soul proprietor ship might be best for you.
But if you’re anybody else out of the business world and you have any concern that you could get sued for some reason then incorporating is the way to go.
When you incorporate with for instance an LLC or an S Corp., you gain something called a corporate shield of liability.
The Corporate Liability Shield
What this means is that if a person gets upset at you or your business and decide to sue you, they can sue your business but they cannot sue you personally. The reason this is important to people is it shields the personal assets of the business owner from somebody who is upset and wants to sue you.
In theory, the most that someone can sue you for is whatever assets and cash are available within your business – because they are suing the business and not you.
The government sees an incorporated business entity like a person and that entity is responsible for the business.
Note – that does not mean that it’s impossible for a person to sue you personally. You are the business owner you are probably an officer of the company and because of those things there’s a possibility someone could sue you as well.
But generally speaking, this corporate liability layer is what shields your personal assets from someone who decides to sue your business.
For this reason alone a lot of business owners prefer to incorporate. Of course there are also tax benefits depending on the business entity that you choose.
PLEASE NOTE: It’s always recommended to consult an account or a tax attorney when making any type of legal decisions, like incorporating a business.
Certainly don’t take the word of something you read on an internet blog – even though we are doing our best to provide you with accurate information.
Incorporating your business involves legally establishing it as a separate entity from its owners.
When choosing a business type, there are several factors to consider such as the level of control you want to maintain, tax implications, and liability protection.
| Starting a Business as: | Pros: | Cons: |
|---|---|---|
| Sole Proprietor | Easy and inexpensive to start Complete control over the business |
Unlimited personal liability Difficult to raise capital |
| Partnership | Easier to raise capital Shared responsibilities and workload |
Unlimited personal liability Disagreements between partners |
| Limited Liability Company (LLC) | Limited personal liability Flexible management structure |
More expensive to start than sole proprietorship Annual filing requirements |
| Corporation | Limited personal liability Easier to raise capital Separate legal entity |
More complex and expensive to start and maintain Double taxation on profits |
Here are the 5 main types of businesses that a new entrepreneur with a small business should choose from:
Sole Proprietorship:
This is the simplest and most common type of business. The owner is personally responsible for all business debts and liabilities, and there is no legal separation between the business and the owner.
Partnership:
This is a business owned by two or more people. Each partner contributes to the business and shares in the profits and losses. The partners are personally responsible for all business debts and liabilities.
Limited Liability Company (LLC):
An LLC provides limited liability protection to its owners, meaning that they are not personally responsible for the business’s debts and liabilities. It also allows for flexible taxation options and can be owned by one or more people.
S Corporation:
An S Corporation is a type of corporation that allows for pass-through taxation, meaning that the company’s profits and losses are passed through to the owners’ personal tax returns. It also provides limited liability protection to its owners.
C Corporation:
A C Corporation is a separate legal entity from its owners and provides limited liability protection. It is subject to double taxation, meaning that the company’s profits are taxed at the corporate level and again when distributed to shareholders as dividends.
Here’s a summary of the pros, cons, tax advantages, and who each business type is best for:
Sole Proprietorship
Pros:
- Simple and easy to set up and maintain
- Complete control over the business
- Tax benefits as profits are reported on personal tax returns
- No separate tax filings required
Cons:
- Unlimited personal liability for business debts and legal obligations
- Difficult to raise capital or obtain loans
- Limited ability to attract investors or partners
Are There Any Tax Advantages:
Sole proprietors can deduct business expenses from their personal tax returns.
Who Is This Business Type Best For:
Individuals who want to start a small business with low overhead costs and have complete control over their business.
Partnership
Pros:
- Simple and easy to set up and maintain
- Shared management and decision-making
- Ability to pool resources and expertise
- Tax benefits as profits are reported on personal tax returns
Cons:
- Unlimited personal liability for business debts and legal obligations
- Potential for disputes among partners
- Limited ability to attract investors or raise capital
Are There Any Tax Advantages:
Partnerships do not pay taxes on their income. Instead, the profits are passed through to the partners who report them on their personal tax returns.
Who Is This Business Type Best For:
Two or more individuals who want to start a business together and share the risks and rewards.
Limited Liability Company (LLC)
Pros:
- Limited personal liability for business debts and legal obligations
- Flexibility in management and ownership structure
- Ability to choose between pass-through taxation or corporate taxation
- No restrictions on the number of owners
Cons:
- More complex to set up and maintain than a sole proprietorship or partnership
- Additional paperwork and filings required
- State-specific regulations and requirements
Are There Any Tax Advantages:
LLCs can choose between being taxed as a sole proprietorship/partnership (pass-through taxation) or as a corporation. This flexibility allows LLC owners to choose the best tax structure for their business.
Who Is This Business Type Best For:
Small business owners who want to protect their personal assets and have flexibility in their ownership and management structure.
S Corporation
Pros:
- Limited personal liability for business debts and legal obligations
- Pass-through taxation, which avoids double taxation
- Ability to attract investors and raise capital through the sale of stock
- Ability to offer employee benefits
Cons:
- More complex to set up and maintain than a sole proprietorship or partnership
- Stricter regulations on ownership and operation
- Limited to 100 shareholders and one class of stock
- Limited ability to write off business losses on personal tax returns
Are There Any Tax Advantages:
S Corporations can pass through profits and losses to shareholders, avoiding double taxation. Shareholders report the profits and losses on their personal tax returns.
Who Is This Business Type Best For:
Small business owners who want to take advantage of pass-through taxation and have the ability to raise capital through the sale of stock.
C Corporation
Pros:
- Limited personal liability for business debts and legal obligations
- Ability to raise capital through the sale of stock
- No restrictions on the number or type of shareholders
- Ability to offer employee benefits
Cons:
- Double taxation, which means profits are taxed at the corporate level and again when distributed to shareholders as dividends
- More complex to set up and maintain than other business types
- Stricter regulations on ownership and operation
- Limited ability to write off business losses on personal tax returns
Are There Any Tax Advantages:
C Corporations can deduct a wide range of business expenses, including salaries and employee benefits.
Who Is This Business Type Best For:
Small business owners who plan to raise capital through the sale of stock, have the potential for high growth, and want to offer employee benefits. This business type may also be suitable for businesses in industries with high liability risks.
Overall, the choice of business type depends on several factors such as the size and nature of the business, the number of owners, the level of personal liability protection desired, and the tax implications. It’s important to carefully consider each option and consult with a professional to determine the best fit for your specific business needs.