Launching your own business is no easy task. You need to have a business plan, pick a location, and find a way to finance your new endeavor.
Somewhere in there, you need to pick a business entity, another way for saying that you need to determine the legal structure of your operation. It’s a key step for ensuring the stability of a business.
There are a few options business owners can choose, including a sole proprietorship, general proprietorship, corporation and LLC.
Let’s take a look at what’s involved in each option, and their advantages and drawbacks:
Sole Proprietorship
This is the simplest and most common form to operate under. It’s an unincorporated business run by you, and requires no formal action to create. If you’re operating under a name other than your own, you’ll need to file a fictitious business name.
There are advantages to this set-up. It’s simple to form, and you have complete control over the business, and are entitled to any profits you make. And at tax time, your preparation is simple, because the business is not taxed separately.
There are also disadvantages. You may have complete control and access to all your business’ profits, but you also bear sole responsibility for your operation’s success or failure. All losses, debts and liabilities are on your shoulders. It’s also more difficult for sole proprietors to find investors and secure bank loans.
Partnership
In this model, two or more people share ownership of a business, each of them contributing money, property or skill, and sharing in profits and losses.
Because more than one person makes decisions for the business, it’s important to draw up a legal partnership agreement to that outlines the rights and obligations for each member.
A partnership is easy and inexpensive to form, with each partner sharing in the financial commitment to the business. In a good partnership, members should have skills and resources that complement each other. And a business that offers new employees the chance to become a partner can attract well-qualified team members.
The drawbacks here are that partnerships can be unequal. One partner might end up putting more work into the business than the other, yet end up with the same amount of profit. This can lead to discord among the partners. And a partnership also requires you to be liable for your own actions as well as the actions of others.
Corporation
A corporation protects individual shareholders from personal liabilities caused by business debts. There is more paperwork involved, and a much more complicated tax structure.
Taxing brings both advantages and disadvantages to a corporation. On the plus side, corporations file taxes separately from their owners, which means the owners pay taxes on corporate profits on salaries, bonuses and dividends, while any other profits are taxed at a lower corporate tax rate. But that also means that corporations can be taxed twice: when the company makes a profit, and again when it pays shareholders dividends.
A corporation is able to raise more capital by selling stock, and can have an easier time attracting employees. But they also require a lot more time, money, and paperwork than a smaller company.
Limited Liability Company
With a limited liability company (LLC), a business gets the limited liability provided by a corporation, with the flexibility and tax efficiencies of a partnership.
Its members are protected from personal liability, which means if the LLC incurs debt, the members own assets are immune. There is more room to share profits, and less record-keeping involved. But members of an LLC must make self-employment tax contributions into Medicare and Social Security. And in many states, a limited liability company is just that. When a member leaves an LLC, the remaining members must decide to start a new LLC or part ways.
Benner and Wild Can Help You Create Your Business Entity
If you’re about to launch a new business venture and are wondering which entity you should adopt, contact Benner and Wild. Our Bucks County attorneys have a wealth of experience in all aspects of business law. We can find you the solutions you need to avoid disputes and keep your business running smoothly.