5 Business Types (And the Best For You)
February 27, 2012 | Posted by PRO U | Tags: Entrepreneurship, Money, Small Business | No Comments
Knowing how to set up your business is the first step in creating it.
PRO U President Jay Kilberg looked at the types of business structures available to entrepreneurs on this month’s Money and Your Business call.
1. Sole proprietorship
Everyone who starts a business without any official registration is automatically considered to be a sole proprietorship. You and your business are the same entity.
You don’t have to do anything, file any documents or set anything up. The major problem with a sole proprietorship is that you are open to liability, since you are your business. Your assets and your business assets are not separated, and therefore remain unprotected.
2. C corp
This type of corporate structure is geared towards large, multinational businesses. To organize your company as a c-corp, you must register with your home state of business. C-corp structures involve shareholders, and the dividends paid to those shareholders are taxable. Although c-corps are protected under corporate umbrellas, there are a lot of inherent administrative issues associated with them due to the size of the c-corp company. As a result, this is not a suitable organization structure for smaller businesses.
3. S corp
This type of structure is not a taxable business entity; the owners of the s-corp are taxed on the business’s profits. These corporations elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
4. General partnership
This is the same as a sole proprietorship except with multiple principals. Each functions just as the single owner would in a sole proprietorship, and therefore is not legally protected. The lack of legal protection means this isn’t the best choice for entrepreneurs.
This is the best choice for small business entrepreneurs because of the legal protection offered. In an LLc (limited liability corporation), the owners are separate from their business interests and are different entities for tax purposes and from a legal standpoint. These types of businesses are governed by operating agreements, which the principals agree to when forming the LLC. The flexibility of the operating agreement and the ability to remain separate from the business make this the most recommended choice for entrepreneurs.
Money and Your Business with Jay Kilberg is a featured monthly call for PRO Foundation members. Click here for 5 Ways to Structure Your Business for Success