Businesses vary according to their goals, costs, investor interest, risk tolerance, and financial standing. There will never be a single, perfect choice for everyone when it comes to the best entities to use for your business. The options vary from sole proprietorship which provides no protection for personal liability to a complex choice that has multiple layers of business entities and provide maximum personal liabilities and anything in between.
Listed below are a few options: limited liability limited partnerships (LLLPs), family limited partnerships (FLPs), C corporations, S corporations, and sole proprietorships. We have listed for you the advantages and disadvantages of each one:
Sole Proprietorship
- Business and person are equal
- There is 0 liability protection meaning that debts are liable to the owner
- No filing requirements & no registration cost
- Taxes are reported on personal tax returns
- There is no requirement to pay unemployment tax
- Owners can mix business and personal assets with no issues
- Owners can take loans only and can’t raise money from selling interest
- Rarely succeeds after the death of the owner(s) meaning they could lose value
Limited Partnership
- Simple and inexpensive to form
- General partners are liable for any dent and ultimately control the business
- Partners do not have control over the business and are usually exempt from the debts incurred
- No annual gatherings required
- Very few formalities required
- Personal tax returns reflect the Partners’ shares of profit & loss
- Taxes tend to be lower versus an LLC or corporation
Limited Liability Company
- Owners are shielded from personal liability for debts incurred by the company
- LLC utilize partnership-style, pass through taxation (advantageous for small companies especially)
- Simple operation and maintenance
- Can offer better liability protection than corporations
- Utilize charging order protection.
- LLC’s are not ideal for businesses looking to become public or make money in the capital market
- More expensive to set up than partnerships
- LLC’s, more often than not, require periodic filings with the state along with annual fees
- Some states don’t allow LLC’s
Corporations
- Owners are shielded from personal liability for company debts or responsibilities
- Corporations have legal precedent to guide their owners
- Best choice for companies that plan to go public at some point
- Corporations can raise money through the sale of securities
- Corporations can utilize the transfer of securities by transferring ownership
- Corporations can have an unlimited lifespan
- Corporations are allowed to create tax benefits sometimes (except C-corporations could be subject to double taxation on profits)
- Corporations require many annual meetings while the owners/directors must observe particular ones
- Corporations are more expensive to start
- Corporations require periodic filings with the state along with paying annual fees
Speak with a legal advisor familiar with these concepts to find out which entity is best for your business.