To incorporate or not, that is the question?
Depending on your business model, it may be easy to argue that you don’t need to incorporate. Depending on your model it may be easy to argue that your business doesn’t involve much risk. While all this may be true, sometimes...just sometimes, things do go awry. Depending on what your choices were, it could be just your business on the line or the business and more.
So, with that in mind, I thought I’d discuss the different types of corporations. Note: as with all types of legal decisions/ matters, you should consult a capable attorney of your choice.
The four types of business organizations I’d like to discuss are:
1. Sole Proprietorship
2. Partnership
3. Corporation
4. S Corporation
5. LLC (Limited Liability Corporation)
The best way to think of each business structure is in terms of the personal liability protection provided and its taxation.
Sole Proprietorship
A sole proprietorship is one of the easiest
business’ to form. I call it the “going it alone” form. The
most
important thing to remember about a sole Proprietorship is that it is
not separate from the owner.
The business and the owner are considered one and the same. A sole proprietor has unlimited liability.When it comes to incomes and expenses, a sole proprietorship passes all profits/losses through to the owner. The owner is responsible for the all business taxes.
Partnership
A Partnership is similar to a Sole partnership but may
have 2 or more owners.
Partnerships also have unlimited liability. Partners may be held liable for others partners. A Partnership is also a pass through entity. Income and expenses are shown partner’s individual tax returns. All business taxes are paid by the partners.
Corporation
Unlike a Sole Proprietorship, A Corporation is a separate legal entity. It protects the owners from personal liability, up to their investment. As a separate legal entity lawsuits would be brought against the corporation instead of the owners.
The Corporation itself pays taxes on its income. Any profits after taxes are retained. Owners only pay taxes on profits actually received i.e...Salaries, bonuses and dividends.
S Corporation
An S Corporation is similar to a Corporation. If things do go awry, it does protect the owners. It does not have unlimited liability. An S Corporation like a Partnership is a pass through entity. Income and expenses are shown partner’s individual tax returns. All business taxes are paid by the partners.
LLC (Limited Liability Corporation)
Still wondering whether you want to incorporate? Here is the last structure. A LLC is a hybrid of both the Partnership and the Corporation. It offers the limited liability protection similar to the Corporation. It is taxed like a partnership.
Incorporate?
The best structure for you will depend on the type of business you
run, your aversion to risk and your income tax situation. You
choose whether to incorporate or not.
