How To Choose The Right Corporate Entity
One of the most commonly asked questions when considering to start a business is what corporate entity to start with, because there is just so much to choose from. The list goes on and on from Sole Proprietorship, Partnership, C Corp, S Corp, and Limited Liability Company (LLC).
A Sole Proprietorship is one of the most common kinds of business organizations; it is reported that over 23 million companies in the United States are Sole Proprietorships. A Sole Proprietorship is the easiest business to start because you don't need to formally register your business or organization in your state. The owner of a Sole Proprietorship is also in complete control of his or her business, and gets all of the profits of the business as well. However, in a Sole Proprietorship your personal finances are the same as your business finances, meaning if you file for bankruptcy for your business, it will also affect you personally.
A partnership is simply when two or more people get together to start a business. They are very similar to Sole Proprietorships because you are still maintaining full liability over your business. Partnerships still operate like Sole Proprietorships, however finances are split among the partners, instead of one sole owner.
C Corps are quite different because they are taxed totally differently. If you are a C Corp, you will be taxed twice by federal tax at 21% and a dividend tax (when investors draw money out) at 15%. C Corps are at a much lower risk of being audited and have limited liability over the company.
S Corps may in fact be the most efficient structures of business because you get a liability shield and proprietorial duration. However, only 75 people can join together to create a S Corp, and everyone has to be a United States citizen. S Corps also utilize a cash method of accounting and have a heightened credibility.
The LLC is somewhat new and not very widely understood. The LLC has a fair level of tax, proper liability shield that protects it's members from law suits. You can essentially write your own law or operating agreement that is not on file with anyone, such as the IRS. Also at any point in time, an LLC can convert to any other corporate entity that suits it.