When forming a new company, one should consider the advantages and disadvantages of each of the ownership structures. Selecting the right structure can help maximize the chances for success. The following questions should be considered in the decision making process:

• Does the entrepreneur want to protect personal assets?
• Will the business have employees?
• Does the business plan to raise capital by selling stock to investors?
• Will your business sell products or provide services?
• Will family members or friends help operate the business?
• Will the business have investors or partners?

Advantages of Sole Proprietorship
• Easy to start up and easy to discontinue
• Subject to fewer regulations relative to other types of businesses
• Owner has full autonomy with regard to business decisions
• Owner does not have to be concerned with double taxation

Disadvantage of Sole Proprietorship
• Will likely have a hard time raising capital
• The owner of the business has unlimited liability

Advantages of a Corporation
• May issue shares of stock to attract investors
• Corporate income splitting may help lower overall tax liability

Disadvantages of a Corporation
• Double taxation of corporate profits and shareholder dividends
• Must hold annual meetings and record minutes
• S Corporations have restrictions on number of owners

Advantages of an LLC
• Has no limit to the number of owners
• Owners can report profit and loss on their individual tax returns
• Not required to hold annual meetings or record minutes

Disadvantages of an LLC
• Cannot engage in corporate income splitting to lower tax liability
• Cannot issue stock

Disclaimer: This post does not constitute legal advice

When considering starting a business, the business entrepreneur will need to decide whether to set up a separate entity for the business. Once the business entrepreneur has decided to set up a separate entity, he or she will need to figure out which type of entity makes the most sense. The most common forms of entities are: corporation, limited liability Company, and limited partnership. Each type varies in terms of its ease in creation and maintenance and the tax consequences to the owners.

Sole Proprietorship:
In a sole proprietorship, there is no legal distinction between the owner and the business. The business is owned and operated by a single person; the owner is entirely responsible for the business’s success or failure. He or she collects any profits, but if the venture loses money and the business cannot cover the loss, the owner is responsible for paying the bills; even if doing so depletes his or her personal assets. No formal filing to establish the entity is required.

Corporation:
The corporation has, until recently, been the most traditional form of business entity. A corporation is owned by one or more stockholders who are issued shares of stock in return for their investment. Although the stockholders may have a role in running the business, their role as stockholders is strictly economic. A stockholder of a corporation is not personally liable for the acts or obligations of the corporation. The corporation is managed by a Board of Directors, which is elected annually by the stockholders. The Board appoints the corporation’s officers, including a President, Treasurer and Secretary, who are responsible for the day-to-day business affairs of the corporation. A corporation is taxed as a separate entity, without regard to the tax status of the individual shareholders. A shareholder is subject to taxation on a dividend distribution, when the dividends are received. Corporations must comply with many formalities, including annual meetings of the stockholders, election of directors, keeping of minutes and a stock transfer ledger.

Limited Liability Company:
limited liability company (“LLC”) has become a popular alternative to the corporation. An LLC is an unincorporated business organization with at least one member. Members may be individuals, corporations, partnerships, or other LLCs. LLCs offer the limited liability of a corporation, but with fewer formalities or record keeping requirements. An LLC can consist of only one or multiple members. Members should enter into an “Operating Agreement” which sets forth the relative rights and obligations of the members regarding contributions, distributions, allocations of profits and management of the business. LLC is not taxed separately but rather passes through its income, deductions, credits, as well as other items, to its members.

Limited Partnership:
A limited partnership is a partnership that includes one or more general partners, who are responsible for the management of the business, and limited partners, who have an economic interest in the partnership, but take no part in the management of the business. Limited partnerships are most commonly used in real estate ventures (although, in recent years, LLC’s are becoming favored alternative entities). General partners are personally liable for the obligations of the partnership. Limited partners, like corporate shareholders, are not liable for partnership obligations beyond their financial contributions. Limited partners may not participate in the management of the partnership’s business.

Disclaimer: This post does not constitute legal advice