Choosing The Best Type Of Business For You

With the new year often comes new resolve and a chance to start fresh. One way many people like to do that is by striking out on a new venture or even making changes to an existing one. But in doing so, there are so many options to choose from even in structuring your business. With so many possibilities, how do you know which is right for your endeavor? Let’s take a look at some of the pros and cons of these options.

Sole Proprietorship
Pros:
No formal creation or cessation process
No separate tax return, report earnings on Schedule C of Form 1040
Con:
No liability protection
Good for: part-time/seasonal home-based businesses

Single Member LLC
Pros:
Much the same as a sole proprietorship for tax reporting purposes
Liability protection except for malpractice
Con:
Laws regarding LLC’s can vary widely from state to state
Good for: businesses with potential liability risk

Multi-member LLC
The same pros and cons as single member with the following exceptions:
Can have an unlimited number of members
Requires a separate tax return for reporting
Good for: business needing capital and/or those expecting changes in ownership over time

General Partnership
Pros:
Unlimited partners and partner types
Flexible allocation of profits, losses and distributions
Cons:
Requires a separate tax return for reporting
No liability protection
Increased complexity in ownership changes and basis tracking
Partners’ income is subject to self-employment taxes on each partners individual tax return
Good for: multiple entities wishing to consolidate or work as one

Limited Liability Partnership
Pros:
Liability protection for limited partners, but must have a general partner with unlimited liability
Limited partners pay self-employment taxes on guaranteed payments only
Cons:
General partners pay self-employment taxes on all income
Separate entity requiring a separate tax return
There are restrictions on partners based on entity type
Good for: businesses with liability exposure and/or inactive partners

C Corporation
Pros:
Greatest level of liability protection
No restrictions on ownership
Perpetual existence
Cons:
Profits are taxed at corporate level and then at personal level when distributed
Complex and can be expensive to create and maintain
Separate entity requiring its own tax return
Good for: businesses that own other businesses, significant liability exposure, high individual tax brackets

S Corporation
Pros:
Excellent liability protection
Profits are taxed at the personal level of the shareholders only
Can have more opportunity for tax savings compared to other options
Cons:
Can be complex
Requires separate tax return
Ownership is limited to specific types of entities
Good for: businesses with exposure to liability, relatively few owners and high profits compared to owner wages

This is by no means a comprehensive list of pros and cons; it is only meant to serve as a starting point for consideration. Additionally, with the new tax laws that will take effect in 2018 and future years, these pros and cons can change depending on your situation. If you are considering starting your own business or restructuring an existing one, please give us a call so we can help you out more extensively with the process.

We pray for good things for you all this new year and for future years to come!

-HERITAGE ACCOUNTING AND TAX SERVICES