Starting your own business can be both challenging and rewarding. You want to make sure you get off on the right foot by choosing the type of entity that’s right for you and your business. To help you make the best possible choice, here are some factors to consider along with which business entity might best serve you.
I Want to Start Right Away
If you want to get out of the gate quickly and don’t have partners, you might consider a sole proprietorship. A sole proprietorship doesn’t require a state business filing, bylaws or other legal paperwork to get started. Taxes are easy to file, too. Any income or loss is reported to the IRS on Schedule C of your personal income tax form.
I Want to Involve Partners
A partnership is the simplest way to start a business that involves partners. Like a sole proprietorship, a partnership doesn’t require a state filing or bylaws, although a partnership agreement of some sort is advised. A partnership does have to file an annual informational tax return, but any actual income or loss gets reported on partners’ individual tax forms.
A multi-member limited liability company (LLC) can also work well for partners, though it requires a state filing in order to operate and has a number of other legal and tax implications. Many professional partnerships – medical practices, law firms, accounting firms, etc. – file as multi-member LLCs.
I Want to Protect My Personal Assets
With sole proprietorships and partnerships, business owners are personally liable for any lawsuits filed against them or their businesses. A lost lawsuit could put not just owners’ business assets in jeopardy but many of their personal ones as well.
Some business structures help owners segregate their business and personal assets, protecting personal assets in the process. Single-member or multi-member LLCs, S corporations and C corporations all provide for such protection, since they create separate legal and tax entities.
I Want to Attract Investors
Many businesses rely on investors to strengthen their core financials. If you desire investors who become shareholders in your company, you should consider either an S corporation or a C corporation. S corporations are limited to a maximum of 100 investors, each of whom must be a U.S. citizen or legal resident.
Owners and investors in S corps report their profits and losses on their personal tax returns. In addition to making state filings in order to operate, both S corps and C corps must hold annual meetings and record meeting minutes.
I Want the Potential for Unlimited Growth
While investors in S corps are capped at 100, investors in C corps are virtually limitless. Once C corps hit $10 million in assets and 500 shareholders, though, they must register with the SEC under the Securities Exchange Act of 1934.
C corps file quarterly tax returns and enjoy certain tax advantages that don’t pertain to other business structures. But they’re also expensive to start, require complex legal paperwork, and are subject to more stringent government oversight.