Historically, the three main types of business entities have been sole proprietor, partnership, and corporation. Today, another common form of business is the limited liability corporation (LLC).
A sole proprietorship is easy and inexpensive to establish, the owner has full control, and there are tax advantages because the income simply flows through to your personal income tax return. A disadvantage of this form of business is the owner’s personal liability – personal assets may be at risk; therefore, use caution before operating as a sole proprietor, especially if you are in a business where lawsuits are prevalent.
A partnership is simple to establish, allows for owner control, and has the added advantage of bringing in partners that may supplement your personal skill set. This is why you will often see professional services organizations, i.e., law firms, accounting firms, and doctors’ offices, formed as partnerships. Partnerships also offer pass-thru tax advantages. A disadvantage to a typical partnership is the potential for personal liability – a partner that participates in running the business may have unlimited personal liability.
A corporation is more expensive to establish and maintain, but offers several advantages. Corporations provide protection against personal liability, make it easy to raise funds by selling ownership shares, and have a continuous life. Because a corporation is treated as a separate entity, though, a downside to the corporation is its tax treatment, often referred to as double taxation. The example below shows the significant effects of the different tax treatment.
A relatively recent, but quite common, choice today is the Limited Liability Company, or LLC. The LLC, which is authorized by individual state law, is a corporation, but since the owners are allowed to choose their tax treatment, it combines the advantages of a corporation (specifically, liability protection) with the advantages of a partnership (pass-thru tax treatment).
For assistance with setting up your business or choosing an entity type, or with any other legal needs related to your business or estate planning, contact Fournier Legal Services at firstname.lastname@example.org or call 860.670.3535 now for a free consultation and planning session.