Business Structure
Choosing the right business structure is one of the first and most important decisions a new business owner will make. Your business structure can affect how you pay taxes, how profits and losses are reported, how much personal liability you may have, how ownership can be transferred, and how the business may continue in the future. The original comparison covers key factors such as continuity of life, owner liability, management, transferability, taxation, deductibility of losses, and distributions for sole proprietorships, partnerships, C corporations, and S corporations.
Common business structures include sole proprietorships, partnerships, limited liability companies, C corporations, and S corporations. The IRS notes that the form of business you choose determines which income tax return you file, and that legal and tax considerations should be reviewed before selecting a structure.
A sole proprietorship is often the simplest form of business. It is generally owned by one person, and business income is reported by the owner. This structure may be easy to start and manage, but the owner may have unlimited personal liability for business debts and obligations.
A partnership is used when two or more people carry on a business together. Income, deductions, gains, and losses generally pass through to the partners. Partnerships can offer flexibility in allocations and management, but owners should have a written agreement covering responsibilities, profit sharing, ownership changes, and exit terms.
A limited liability company, or LLC, is a flexible business structure created under state law. LLC owners are called members, and most states allow individuals, corporations, other LLCs, and foreign entities to be members. For federal tax purposes, an LLC may be treated as a disregarded entity, partnership, C corporation, or S corporation, depending on the number of owners and elections made.
A C corporation is a separate legal and tax entity. It may provide limited liability protection and can continue indefinitely, but corporate income may be taxed at the corporate level and dividends may also be taxed to shareholders. This structure may be appropriate for businesses planning to raise capital, issue stock, or retain earnings for growth.
An S corporation is not a separate legal entity type by itself, but a federal tax election available to qualifying corporations and some LLCs. It generally allows business income, deductions, and losses to pass through to shareholders, while still providing corporate-style liability protection. However, S corporations have eligibility requirements and operational rules that should be reviewed carefully.
There is no single structure that is best for everyone. The right choice depends on your ownership plan, liability concerns, tax situation, financing needs, management style, and long-term business goals. Before forming or changing a business entity, consult with a tax professional and, when appropriate, an attorney.
Run It Better helps individuals and businesses evaluate accounting, tax, and business considerations so they can make better business and financial decisions.
Common business structures include sole proprietorships, partnerships, limited liability companies, C corporations, and S corporations. The IRS notes that the form of business you choose determines which income tax return you file, and that legal and tax considerations should be reviewed before selecting a structure.
A sole proprietorship is often the simplest form of business. It is generally owned by one person, and business income is reported by the owner. This structure may be easy to start and manage, but the owner may have unlimited personal liability for business debts and obligations.
A partnership is used when two or more people carry on a business together. Income, deductions, gains, and losses generally pass through to the partners. Partnerships can offer flexibility in allocations and management, but owners should have a written agreement covering responsibilities, profit sharing, ownership changes, and exit terms.
A limited liability company, or LLC, is a flexible business structure created under state law. LLC owners are called members, and most states allow individuals, corporations, other LLCs, and foreign entities to be members. For federal tax purposes, an LLC may be treated as a disregarded entity, partnership, C corporation, or S corporation, depending on the number of owners and elections made.
A C corporation is a separate legal and tax entity. It may provide limited liability protection and can continue indefinitely, but corporate income may be taxed at the corporate level and dividends may also be taxed to shareholders. This structure may be appropriate for businesses planning to raise capital, issue stock, or retain earnings for growth.
An S corporation is not a separate legal entity type by itself, but a federal tax election available to qualifying corporations and some LLCs. It generally allows business income, deductions, and losses to pass through to shareholders, while still providing corporate-style liability protection. However, S corporations have eligibility requirements and operational rules that should be reviewed carefully.
There is no single structure that is best for everyone. The right choice depends on your ownership plan, liability concerns, tax situation, financing needs, management style, and long-term business goals. Before forming or changing a business entity, consult with a tax professional and, when appropriate, an attorney.
Run It Better helps individuals and businesses evaluate accounting, tax, and business considerations so they can make better business and financial decisions.