Here’s a quick run-down of the pros and cons of sole proprietorship, partnerships, LLCs, and corporations to help you decide which business structure will work best for you.
Sole Proprietorship
Pros:
Very easy to set up and run.
No paperwork involved in setting up the business structure.
The management system is flexible.
Business funds and personal funds can be combined.
No special bookkeeping is required.
All business profits and losses are treated as personal income, so each person only needs to file one tax return.
Cons:
No limited liability means you are liable for business debts and lawsuits.
It’s not a good choice if you plan to have employees.
You can’t sell the stock, so it may be difficult to raise money for your business.
There are no tax deductions available for employee benefits if you do have employees.
It is difficult to pass on your business since it doesn’t technically exist apart from you.
Partnerships
Pros:
Very easy to set up and run.
No paperwork involved in setting up the business structure, though drafting a partnership agreement is a wise idea.
The management system is flexible.
Business funds and personal funds can be combined.
No special bookkeeping is required.
All business profits and losses are treated as personal income, so each person only needs to file one tax return.
Cons:
No limited liability means you are liable for business debts and lawsuits.
You can’t sell the stock, so it may be difficult to raise money for your business.
There are no tax deductions available for employee benefits.
It is difficult to pass on your business since it doesn’t technically exist apart from you.
Limited Liability Companies
Pros:
Personal liability is limited, meaning in most cases you won’t be held liable for claims against your business.
The management system is flexible.
There is comparatively less paperwork and formalities than with corporations.
All business profits and losses are treated as personal income, so each person only needs to file one tax return.
The business can be taxed like a corporation if you choose, so you can save by paying the corporate tax while keeping the informal structure of an LLC.
No special bookkeeping is required.
It’s better for people with employees because expenses for employee benefits are tax-deductible.
Customers may trust your business more with the LLC after your name.
There is a flexible profit allocation.
Cons:
More complicated to set up than a sole proprietorship or general partnership.
Requires paying a filing fee and perhaps annual fees.
Tax paperwork is slightly more complicated since you need to file a Form 1065 along with your tax return.
You can’t sell the stock, so it may be difficult to raise money for your business.
Corporate records are more complicated than with a sole proprietorship or general partnership.
Corporation
Pros:
Personal liability is limited, meaning in most cases you won’t be held liable for claims against your business.
Forming a corporation shows you’re serious about your business.
Customers may trust your business more because of the “Inc.” or “Ltd.” after your name.
You can sell the stock, so it is easier to attract investors, including foreign investors.
Expenses for employee benefits are tax-deductible.
Corporate income tax on money kept in the business may save you money.
It is relatively easy to pass on or sell a corporation since it is a separate entity.
Cons:
It can be expensive and complicated to form.
The structure of your business is mandated by law, including having regular meetings, board members, etc.
Bookkeeping and other formalities are more complicated.
Two tax returns must be filed: one for the corporation and one for the individual.
If you sell stock widely, you may be subject to securities laws.
Less flexible in terms of dividing profits.
Double taxation can be a problem when selling assets of the business.
That’s a quick breakdown of the pro’s and con’s that you face when choosing how to structure your business.
Analyze each and then ask your tax attorney about the one you feel is best for your business.
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