If you’re considering purchasing an existing business or starting a new one from scratch, you’re going to need to consider what form of structure your business will take. There are several different types of business entities commonly used in the U.S., and each has its specific applications and advantages. The entity you select will influence how much you pay in taxes, the paperwork you’ll need to file, and your personal liability.
Let’s review a few of the most common business structures with some brief notes on what they mean for your overall tax picture…
Business Structures: Partnerships
Sole Proprietorship (SP)
As the name suggests, a sole proprietorship gives you maximum control over your business and its finances. Under an SP, you can give your business a trade name, but cannot sell stock. You also may find it more difficult to obtain a business loan from a bank. Also a sole proprietorship does not entail the creation of an entity separate from the proprietor’s personal finances, meaning that your personal assets and business assets are considered as one. So if you’re sued or your business fails, your personal assets could be at risk under an SP.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) provides an easy way for two or more people to enter a business enterprise together. LLPs assign limited liability to each of the business partners. The structure of an LLP is designed to protect each partner from debts incurred by the partnership and provides that you (as a limited partner) will not be held responsible for the actions of the other partners. A limited liability partnership protects your personal assets (home, car, etc.) from being attached to any claim made against the partnership.
Business Structures: Corporations
Limited Liability Company (LLC)
The Limited Liability Company (LLC) combines advantages from both partnership and corporate structures. For example, profits and losses may pass through your personal income without being subject to corporate tax. As an LLC, however, you are considered self-employed and must pay self-employment tax toward Medicare and Social Security. LLCs often have short life spans, as some states require an LLC to be dissolved when one or more of the partners depart. There are agreements that can preserve an LLC through such a transition, but these must be in place first. With an LLC, you may have a lower tax liability than with a corporation.
Corporation (C Corp)
A corporate structure is a legal entity that exists separate from its owners. Corporations may earn profits, be taxed, and may be held legally liable. While the cost to form a Corp C is higher than that for other structures, a C Corp does offer a great deal of protection from personal liability. Corporations differ from SPs, LLPs, and LLCs in that corporate profits may be taxed twice—once when earned and a second time when dividends are paid to shareholders (if applicable). Corporations are considered independent from their owners as well as their shareholders. So even if a partner leaves or a major shareholder sells their stock, the corporate entity can continue.
To avoid the double-taxation issue of the C Corp, the S Corp allows profits (and certain losses) to pass through your personal income as owner, without triggering a corporate tax. States tax S Corps differently, but overall, most view them as the federal government does and taxes shareholders accordingly. S Corps have some limitations. For example, they may have no more than 100 shareholders and all shareholders must be U.S. residents.
A Benefits Corporation (or B Corp) is a new type for-profit enterprise that maintains a private certification. Entities interested in obtaining a B Corp designation must meet particular social and environmental performance standards, as well as maintaining commitments to employees, shareholders and the community. Examples include companies such as King Arthur Flour, Kickstarter, and Farmingo. Directors of B Corps must take into account the impact of the company’s actions on all stakeholders and must publish an annual report on social/environmental performance to ensure transparency.
Nonprofits are generally engaged in activities that serve the public good, such as promoting art, literature, education, charity, faith-based work and even science. Organizationally, they follow many of the same rules as a C Corp, and are restricted in what they do with any profits they earn. Often called 501(c)(3) corporations, the federal designation for tax-exempt businesses.
Ideal for smaller, less formal business operations, the Co-op structure is typically for the direct benefit of the owners. Earnings are distributed among the members (often called “user-owners”), and profits are shared similarly. Individuals may become members of a Co-op by purchasing shares but the number of shares they hold does not affect the weight of their vote.
At Moskowitz LLC, we take the time to listen and to understand the tax needs of your business, whether large or small. Our skilled attorneys and tax professionals are ready to help you successfully navigate the often daunting landscape of business structures and corporate taxes. Considering starting or purchasing a new business?
Contact us today, and let us help you get on the path to success!