Choose Your Form of Entity

Your new business can operate as either a:

• Sole Proprietorship
• Corporation
• S Corporation
• Limited Liability Company
• Partnership

Which is best for you?

Sole Proprietorship

A sole proprietorship is easy to start but not recommended. Your personal assets are not protected from business creditors or lawsuits. Self employment taxes, in addition to regular income tax, are paid on the profits of the business. The IRS audit rate is high as about 1 in 20 are audited yearly.

Corporation

A regular Corporation protects your personal assets from the debts of the business. However, you will be subjected to double taxation. The income earned by the corporation is taxed at corporate tax rates and the dividends you take out are taxed at your personal tax rate.

S Corporation

The S Corporation was first allowed by Congress in 1958 to help small business owners. You receive the same legal protection as in a regular corporation, but do not pay the double tax. There are some limitations, so not every entity can be an S Corporation. You must have fewer than 100 shareholders and none of them can be nonresident aliens. This is generally the most advantageous choice for small business owners today.

Limited Liability Company

The Limited Liability Company is popular for entities that cannot be an S Corporation. It is a much newer form of entity and Congress has never clarified the rules. There is no limit to the number of members and nonresident aliens are allowed. Unlike a corporation, the LLC does not continue forever, it will terminate at a predetermined date or when a substantial amount of the ownership changes hands.

Also, shares are not as easily transferred as shares of stock in a corporation. The argument is sometimes made that the LLC is subject to less structure by way of corporate minutes and board of directors meetings and is therefore easier to run than an S Corporation. However, the IRS still requires records of operations and decision making actions to be kept, so it is a fairly moot point.

Partnership

The partnership was generally used for real estate before Limited Liability Companies were available. A partnership is generally not favorable because all partners have unlimited liability for the actions of all other partners on behalf of the partnership