Setting up a small business is hard but even harder when choosing the right entity structure. Significant differences exist in a corporation, a partnership, a Limited Liability Company (LLC), or an S-Corporation.
Which Small Business Legal Structure is Right for You?
Each entity type has pros and cons. So, choosing the right structure for your small business depends on your long-term goal. Before selecting an entity structure, you must decide what is most important and weigh the pros and cons.
Corporations help small businesses attract investors, raise capital and offer employees stock options. There are, however, more taxes required. More taxes also comes with more paperwork to track because profits are taxed twice: at the corporate and individual levels.
Partnerships help avoid the double taxation of a corporation and provide options for unique payout methods. For example, one partner can contribute 10% of the capital but get paid 50% of the profit. With partnership agreements, you decide the rules. There is a downside because your assets are always at risk.
Limited Liability Companies (LLCs)
LLCs are easy and have minimal paperwork, but deciding the best taxation is challenging. An LLC is a state regulatory classification. It is taxed like a corporation, partnership, S-corporation, or sole proprietor. You choose your business taxation; however, you must adhere to those taxation rules thereafter.
S-Corporations combine aspects of a partnership and a corporation. An S-corp provides a partnership’s tax benefit and the corporation’s legal protection. There are substantial qualification restrictions that limit your flexibility of profit sharing.
Hopefully, you are clearly getting started as you consider the structure of your business setup. The big factors are the tax implications. Our experts at Tax Time CPAs will walk you through each scenario and find the best fit for your business. Schedule a Discovery Call to explore the right fit for your long-term goals.