Starting a business is an exciting journey for many hopeful entrepreneurs. However, it can also be intimidating, overwhelming and incredibly scary stepping out on your own. You may have the business side of things under control and mapped out, but now you have to focus on the legal requirements to officially launch a business corporation. Selecting a business entity is based around the needs (present and future) of the business and its owner(s). Business and personal assets, business taxes, start-up costs, and the inclusion of shareholders are just a few examples of choices that impact which type of business entity you choose to file for. Here are the basics that you need to know as you decide whether to register as an S Corp, a C Corp, an LLC, sole proprietorship or a partnership.
What Types of Corporations are Available?
- Sole Proprietorship: This is the most basic business structure and is established by an individual. Legally, there is no separation from the business and the individual so the owner is completely responsible for its debt and tax liability (as opposed to the LLC, S Corp and C Corp listed below).
- Partnership: The partners in a partnership can be individuals, corporations or trusts and the ownership is shared among the partners; profits or losses are allocated according to their contractual terms and are reported on the individual tax returns of each owner. As with a Sole Proprietorship, there is no limited liability protection so if the company is sued or acquires debt, the partners’ personal property is at risk.
- LLC (Limited Liability Corporation): This is a great option for those who want minimal risk when starting their business along with more management flexibility and less complex tax filings. If you happen to go into debt, your personal assets are protected and won’t be revoked to pay for outstanding business expenses. Additionally, your net income or loss is “passed through” to the personal income of the owner(s)/member(s), and is simply taxed as personal income for state tax returns and federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single member LLC). LLCs can have one owner or be a partnership, can be owned by non-US citizens, and involve less management requirements than an S Corp or C Corp.
- S Corp (S Corporation): An S Corp provides limited liability like an LLC but combines it with the pass-through taxation of a partnership. This was enacted so that shareholders could avoid costly double-taxation where their income would be taxed at the company level and again at the individual level. However, there are specific requirements that companies need to abide by to qualify to become an S Corp. You can read more on our S Corp page to understand these requirements.
- C Corp (C Corporation): A C Corp creates a new, separate, legal entity that is distinct from its owner(s). It can have its own bank accounts, enter into legal commitments, create its own credit identity and purchase property and assets. C Corp owners (called “Shareholders”) also have the benefits of limited liability since their losses are connected to the amount of their investment within the corporation.
Each of these types of corporations have distinct advantages and disadvantages. While the decision to choose which business entity is right for your business may seem difficult, we’re here to help. We love this awesome infographic that was designed by University of Southern California Gould Law School to help you to decide which option is best for you: