Business Entity Formation
Deciding what form your business entity should be is a crucial decision in starting your new venture. Some of the more popular entity forms for small businesses and entrepreneurs are LLC and S-Corp. Each entity form has its benefits and drawbacks.
For example, a sole proprietorship allows the greatest ease and cheapest to form; however, it leaves all of your personal assets completely exposed to liability.
A partnership is similar to a sole proprietorship where the personal assets of all of the partners are exposed to liability.
A Limited Liability Company (LLC) is a simple way of protecting your personal assets and the personal assets of your partners.
The next level of complexity would be forming your business as a corporation. A corporation protects the limits the liability of the owners (shareholders) to the amount invested and can allow some greater flexibility than LLC such as issuing shares. Some refer to this as an S-corp. or C-corp.
The S-corp refers to a IRS subchapter “S” that allows the corporation to do pass-through taxation. You must file this subchapter S election with the IRS. .
What is being referred to as a C-corp is a corporation that hasn’t elected to be a subchapter S.
Deciding on a correct business entity form can have significant legal and tax consequences. Spending a little extra to consult with an attorney and tax advisor could save you a lot of money and headaches in the future.
| Entity Form | Cost | Ease | Liability Protection | Pass-Through Tax |
|---|---|---|---|---|
| *PLLC is a designation for a Professional Limited Liability Company | ||||
| Sole Proprietor | $ | ***** | ||
| Partnership | $ | **** | ||
| LLC, PLLC* | $$ | *** | ||
| Corporation (S) | $$$ | ** | ||
| Corporation | $$$ | ** | ||
| Limited Partnership | $$ | *** | ||
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