Whether you’ve recently purchased a business or are looking to start your own, one of the most important decisions you’ll make is that of choosing a structure for small business. After all, the structure you end up selecting can have a major impact on your taxation, how your assets are protected, and the types of small business lending for which you may be eligible. By understanding the advantages and potential drawbacks of the most common small business structure options, you can ultimately choose the one that best suits your needs.
Limited Liability Companies (LLCs)
In many ways, an LLC is a hybrid of a partnership and a business corporation. Specifically, LLCs enjoy the asset protection of a corporation with the tax benefits of a partnership. An LLC’s income is taxed at the individual level rather than the corporate/entity level, and the business owner’s personal assets and finances are protected in the event of a lawsuit, bankruptcy, or similar situation. On the other hand, it can be more difficult to secure financing as an LLC, as most outside investors will prefer to invest in a corporation where they can enjoy a share of the company. Top 10 lending institutions for small business here.
A partnership is a business entity controlled or owned by two or more people. These structures allow for all partners involved to contribute money or labor to the business in exchange for a stake in the company. There are two main types of partnerships available:
- general partnerships – these allow all partners to enjoy an equal shares in the company.
- limited partnerships – these require one partner to be listed as having sole control over the company’s operation while still allowing other partners to contribute and receive part of the profits.
Business owners who opt for this entity type enjoy the ease-of-setup involved, along with the many tax benefits available to them. Specifically, business partnerships are not required to pay income taxes; instead, each partner reports his or her own profits and losses, filing and paying taxes on them accordingly.
On the other hand, partnerships don’t offer much in the way of asset protection. If your business is sued or goes into bankruptcy, you and your partner’s personal assets could be at risk.
Unlike LLCs and partnerships, corporations (both C and S) are structured to exist independently of their owners. In this sense, corporations have their own legal rights. There are a few different types of possible Nevada corporations, but we’ll focus on the two most common: C and S corporations.
A C corporation is a business owned by shareholders, with an unlimited number of shareholder positions available. This tends to be a popular option among small businesses looking for venture capital or financing. C corporations also do a better job of protecting personal assets, as each owner’s liability is limited to the amount he or she invested in the business itself.
As far as taxes go, C corporations can help reduce taxes owed by offering the flexibility to distribute business earnings and set individual salaries. However, because C corporations must pay taxes on corporate income in addition to shareholder distributions. This is actually one of the main drawbacks to a C corporation structure, as this opens up the possibility for double taxation.
S corporations differ from C corporations in the sense that they are taxed differently and have strict limitations on the number of potential shareholders. Specifically, an S corporation may have no more than 100 shareholders. Furthermore, shareholders in this type of corporation must be US citizens/residents (the same doesn’t apply to C corporations). Unlike a C corporation, on the other hand, an S corporation doesn’t face the risk of double taxation, since no taxes are paid at the corporate level. Instead, taxes on profits are paid at the shareholder level as part of their individual tax returns.
S corporations involve a similar set-up process as a C corporation and enjoy similar asset protection for small business.
Now that you have a better idea as to the main differences between LLCs, partnerships, C corporations, and S corporations, which option is best for your business? If you have any further questions or need assistance in selecting the right structure for your business, consider meeting with a small business financial advisor for professional guidance.