Choosing the Right Entity
If you are looking to start your own business, there are many things to consider.
One of the most important things is what kind of business entity you should be.
The four most common are: Sole Proprietor, Limited Liability Company, S-Corporation, and C-Corporation.
Which business type you choose depends on what kind of business your company will be doing, how you want to be taxed, and what kind of liability protection you want.
To help you decide what might be best for you, here is a brief explanation of each type of entity.
Sole Proprietor - If you don't choose a different entity and go through the proper process, you will by default be a Sole Proprietor.
All you need to do is obtain any city or state licensing that is required and start doing business.
It is the least expensive and easiest to start.
A Sole Proprietor has no tax benefits or liability protection.
However, if you are just starting out and you aren't sure if the business is going to take off, you may want to start this way.
Limited Liability Company (LLC) - The Limited Liability Company is a newer entity.
It has only been around since 1961, but has become very popular.
A Limited Liability Company has great liability protection but no tax benefits.
As a matter of fact, if there is only one member, it is treated the same as a Sole Proprietor for tax purposes.
What a Limited Liability Company is good for is holding assets.
Placing real estate in an LLC is a good strategy.
Also placing your businesses equipment in an LLC and then renting it from the LLC is also a good strategy.
The income or loss from a LLC is reported on the owner's personal tax return and it must be registered with the Division of Corporations in your state.
S-Corporation - A Sub Chapter S-Corporation is the most common entity for a small business.
Like the LLC the profit or Loss is reported on the owner's personal tax return.
However, the S-Corporation provides both liability protection and tax benefits.
Through an S-Corp, the owners can often save thousands of dollars in Social Security and Medicare taxes.
This entity has the same benefits if there is one owner or if there are multiple owners.
Also, an S-Corporation is filed with the Division of Corporations.
C- Corporation - This type of corporation is the most complicated of all the entities.
It is generally for larger corporations.
A C-Corp is filed with the Division of Corporations and pays it's own taxes.
There must be at least three people involved to make it run properly, but they don't have to be owners.
A C-Corp is a good entity if you want to go public, or in other words, sell stock in the company.
There are many meetings that must be held and there is the possibility of double taxation.
One of the most important things is what kind of business entity you should be.
The four most common are: Sole Proprietor, Limited Liability Company, S-Corporation, and C-Corporation.
Which business type you choose depends on what kind of business your company will be doing, how you want to be taxed, and what kind of liability protection you want.
To help you decide what might be best for you, here is a brief explanation of each type of entity.
Sole Proprietor - If you don't choose a different entity and go through the proper process, you will by default be a Sole Proprietor.
All you need to do is obtain any city or state licensing that is required and start doing business.
It is the least expensive and easiest to start.
A Sole Proprietor has no tax benefits or liability protection.
However, if you are just starting out and you aren't sure if the business is going to take off, you may want to start this way.
Limited Liability Company (LLC) - The Limited Liability Company is a newer entity.
It has only been around since 1961, but has become very popular.
A Limited Liability Company has great liability protection but no tax benefits.
As a matter of fact, if there is only one member, it is treated the same as a Sole Proprietor for tax purposes.
What a Limited Liability Company is good for is holding assets.
Placing real estate in an LLC is a good strategy.
Also placing your businesses equipment in an LLC and then renting it from the LLC is also a good strategy.
The income or loss from a LLC is reported on the owner's personal tax return and it must be registered with the Division of Corporations in your state.
S-Corporation - A Sub Chapter S-Corporation is the most common entity for a small business.
Like the LLC the profit or Loss is reported on the owner's personal tax return.
However, the S-Corporation provides both liability protection and tax benefits.
Through an S-Corp, the owners can often save thousands of dollars in Social Security and Medicare taxes.
This entity has the same benefits if there is one owner or if there are multiple owners.
Also, an S-Corporation is filed with the Division of Corporations.
C- Corporation - This type of corporation is the most complicated of all the entities.
It is generally for larger corporations.
A C-Corp is filed with the Division of Corporations and pays it's own taxes.
There must be at least three people involved to make it run properly, but they don't have to be owners.
A C-Corp is a good entity if you want to go public, or in other words, sell stock in the company.
There are many meetings that must be held and there is the possibility of double taxation.