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Business Structures in the United States
If you have decided to become an entrepreneur, one of the first steps to creating your business is deciding what type of business you will be. Each form of business has advantages and disadvantages. Read the following descriptions and consult and accountant or lawyer to decide which type is right for you.
Sole Proprietorship
A sole proprietorship is a business that is formed by a person who owns and operates it. Usually, it is required that the business name have the owner's name in it.
Advantages:
- Easy to form with few formal business requirements
- No corporate tax payments
- Owner has complete control over the business
Disadvantages:
- Owner of business is personally liable and responsible for all debts and obligations associated with the business
- Difficult to find investors
General Partnership
A general partnership is similar to a sole proprietorship, except there is more than one owner involved. All partners are responsible for the liabilities of the business, and they share the profits.
Advantages:
- Financial commitments are shared by more than one person
- More expertise and experience than a sole proprietorship
- Inexpensive to start and few formalities
Disadvantages:
- Partners are liable for the debts and liabilities from other partner's decisions
- Partners are personally liable and responsible for all debts and obligations associated with the business
- Business decisions must be discussed and agreed upon by the partners
- Difficult to attract investors
Limited Partnership
A limited partnership provides limited liabilities for the partners who own the business. At least one partner is the 'general partner' and acts as the controlling partner for the business. The liability of the limited partners is limited to the amount that they invest in the company.
Advantages:
- Because there is more than one owner, all decisions do not rest on one person's shoulders
- Limited partners can leave the business or be replaced without dissolving the entire business
Disadvantages:
- More filings, forms, and state requirements than a sole proprietorship
- General partners are personally liable and responsible for all debts and obligations
Limited Liability Corporation (LLC)
A limited liability corporation, or a LLC, is similar to a corporation, but it is taxed differently. Owners are required to write an operating agreement, which outlines the affairs and conduct of the business. This type of organization must file paperwork with the state.
Advantages:
- No double taxation of profits
- More flexibility with fewer restrictions than a corporation
- More protection for owner's than with a partnership or sole proprietorship
Disadvantages:
- Earnings from the LLC are subject to self-employment taxes, which can be higher than regular income taxes
C-Corporation
A C-Corporation is the most common type of corporation. A corporation of a business form that exists separated from its owners and it has articles of incorporation filed with the state. Ownership in the corporation is determined by ownership of the stock and shareholder's risk is limited to the amount they invested in the corporation.
Advantages:
- The corporation is a separate legal entity and the share holders usually have protection from the debts and obligations of the corporation
- The corporation continues to exist if a shareholder dies or sells the company shares
- Easier to raise investment money
Disadvantages:
- Double taxation - income is taxed twice (corporate income tax and dividend tax)
- More expensive to form than other business forms
- More rules and regulations than with other forms of business
S-Corporation
The S-Corp is the same as a C-Corp, but it has a different tax structure. With an S-Corp, the corporation is taxed like a sole proprietor or partnership and it requires the organization to file IRS form 2553 within 75 days of incorporating.
Advantages:
- Shareholders can claim company losses on their personal tax returns
- Liability protection without having to pay corporate income tax
- Minimal self-employment and FICA tax
- Easier to raise investment money than with other business forms
Disadvantages:
- Limited number of shareholders with restrictions on who may become a shareholder
- More expensive to form than other business forms
- More rules and regulations than with other forms of business
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