Startup businesses often ask: Which entity should I choose? Different lawyers may have different perspectives. The difference between starting a company that may potentially go IPO and managing a Bakery Store is huge. Well, the only answer to the question above is to choose a formation that meets your needs. Here we want to discuss the pros and cons of each type of entity.
- Sole Proprietorship
A sole proprietorship is the most convenient way for you to start a business by yourself. You only need to fill out some simple government forms setup. You could make flexible changes to your business without the approval of others. The no legal distinction between the owner and the business entity, which means you receive all profits. On the flip side, you also have to pay unlimited PERSONAL liability for all losses and debts. This type of business may suit the needs of people who want to have everything related to their business attached to them, as an individual, and under their control. A unique style local coffee shop or restaurant may be good examples. It’s certainly the lowest cost way to start your own business but is also very risky (think what if someone falls and hurts themselves in your coffee shop).
- General Partnership (GP)
Compared to working as a sole trader on your own, you can benefit from companionship and mutual support when working in a business partnership. In a General Partnership, you and your partners would share the management of a business, and each partner would be personally liable for all debts and obligations incurred. This means that even if you have no faults in operating the business, you might have to settle 100% of the partnership debts when the other partners have no assets.
- Limited Liability Partnership (LLP）
A limited liability partnership could help you avoid the pitfalls mentioned above. LLP is a partnership in which you are not liable for the malpractice of other partners. But you remain personally liable for obligations to business creditors, landlords, and lenders. Same as GP, you take a share of loss or gain on your income taxes. But you should know that not every state recognizes LLP, some states limit the creation of LLP to professionals such as doctors or lawyers.
A C-corporation is the most typical business formation. As a C-corporation owner, you could finally enjoy the limited liability protection for the debts, judgments, and other obligations of the company. You could get certain benefits of deduction as business expenses with good accounting. If you plan to go IPO or get acquired someday, the C-corporation is your best choice. The main disadvantage is so-called the “double-tax”, the corporation itself is taxed for any profits earned, and any individual stockholder who earned profits in the form of dividends from the corporation is also taxed. If you have such concerns, you have an option to establish an S-corporation.
S-corporation can only form if there is already a C-corporation. S-corporation enjoys most of the advantages of C-corporation and the company does not need to pay income tax itself. There are several requirements an S-corporation should meet, for example, it should be a domestic corporation, can only have a limited number of shareholders, and has only one class of stock. Most importantly, all shareholders must be U.S. citizens or lawful permanent residents and not other corporations or LLCs. An S-corp is not a good choice for IPO or acquisition due to some of these restrictions.
- Limited Liability Company (LLC）
LLC is a newer type of company compared with a traditional corporation with a more flexible management structure. Members can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members. With the advantages of limited liability and no restriction on ownership, the formation and ownership are less stringent than with C-corporation and S-corporation. Moreover, the transfer of ownership for an LLC is more complicated than the former ones. You should also notice that some states have the requirements that LLCs should have more than one member. In comparison with a Sole Proprietorship, an LLC is relatively cheap and easy to set up but yet can protect small business owners from unlimited personal liability, so it’s an excellent choice for small business owners who want to enjoy the protection of a company formation.
- Professional Limited Liability Company (PLLC）
In many states, professionals whose jobs require licensing by the state are not allowed to form an LLC. Following the restriction, they must form a PLLC instead. PLLC has the advantages of an LLC such as protection from personal liability, perpetual existence, and you can choose how the LLC will be taxed, either as a partnership or a corporation. Except for the disadvantage same as the LLC, all members of a PLLC must belong to the same profession.
We hope to help you weigh up the complexities of the different kinds of company formation by simplifying the categories into a graph
*The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.